Performance-based Compensation Research Articles

The Impact of Performance-Based CEO and CFO Compensation on Internal Control Quality

In this paper we examine the effects of performance-based compensation on the quality of internal control. We find that the sensitivities of CEO and CFO option portfolios and long-term incentive plans to stock price changes are negatively related to the propensity to report internal control weaknesses between January 2004 and December 2006. We also find that sensitivity is more strongly related to company-level than account-specific control weaknesses. This relation is stronger for CFOs, the officers primarily responsible for the processes generating financial information, and the financial information actually reported by the firm. Despite this positive impact on internal control, compensation sensitivity is positively related to accruals manipulation. Our findings indicate that while SOX disclosures harness the power of compensation schemes to enhance internal control, the controls implemented are not sufficient to eliminate the incentive to manipulate accruals within the bounds of GAAP arising from unvested options and unrestricted equity holdings.

Optimal Dynamic Contracts with Moral Hazard and Costly Monitoring

We introduce a tractable dynamic monitoring technology into a continuous-time moral-hazard problem and study the optimal long-term contract between principal and agent. Monitoring adds value by allowing the principal to reduce the intensity of performance-based incentives, reducing the likelihood of costly termination. We present a novel characterization of optimal dynamic incentive provision when performance-based incentives may decline continuously to zero. Termination happens in equilibrium only if its costs are relatively low. In general, the intensity of both monitoring and performance-based compensation can be non-monotonic functions of the quality of past performance. Our results can also help explain puzzling empirical findings on the relationship between performance history and future pay-performance sensitivity and on the linkage between termination, performance, and monitoring. We also discuss implications of our model for optimal security design and endogenous financing constraints.

IRS ruling affects deduction of performance‐based compensation

IRS ruling affects deduction of performance‐based compensation

Performance-Based Compensation: How an Oral History Can Inform Our Understanding of Accounting Partnership Income Allocation Models

This research explores how an oral history can inform our understanding of accounting partnership income allocation models. Forty oral history interviews of CPA firm partners indicated a widespread impact from unclear and instable role definitions in performance-based compensation arrangements. The oral history interviews suggested partnerships adopted performance-based compensation systems without consideration of the extent to which the success of such systems depended on stable role specificity. This research has implications for corporations where the interests of the entity may be best served when top management undertake diverse or previously unspecified roles and activities, on an ad-hoc or opportunistic basis.

HRM Practices and Knowledge Transfer in MNCs

This chapter introduces HRM practices that help MNCs to overcome knowledge transfer barriers (knowledge-driven HRM practices). It argues that MNCs can institute various HRM practices that impact knowledge transfer barriers associated with behavior of knowledge senders and receivers. HRM practices relevant for absorptive capacity of subsidiary employees form two groups – cognitive (job analysis, recruitment, selection, international rotation, career management, training and performance appraisal) and stimulative (promotion, performance-based compensation, internal transfer, orientation programs, job design and flexible working practices). The application of cognitive HRM practices enhances the ability of knowledge receivers to absorb transferred knowledge, while the use of stimulative HRM practices increases their motivation. Temporary and permanent types of international assignments respectively influence the ability and motivation of expatriate managers to share their knowledge.

Executive Compensation and Macroeconomic Fluctuations

Macroeconomic fluctuations affect corporations' performance through demand and cost conditions. Incentive effects of performance-based compensation schemes for management may be weakened or biased by macroeconomic influences if management is unable to forecast macroeconomic fluctuations or unable to adjust operations in response to changes in macroeconomic conditions. In this paper we analyze the impact of macroeconomic, industry and firm-specific factors on salaries and bonus of CEOs in 131 Swedish corporations during the period 2001-2006. A distinction is made between anticipated and unanticipated macroeconomic fluctuations. The macroeconomic influences on performance and compensation can be expected to vary from firm to firm in terms of magnitude of effects, as well as in terms of relevant macroeconomic variables. The estimates obtained in this paper refer to the average impact across the sample of firms. We find that the average Swedish CEOs' compensation is explained to a substantial extent by macroeconomic factors; less so by unanticipated factors alone.

Attracting Creativity: The Initial and Aggregate Effects of Contract Selection on Creativity-Weighted Productivity

ABSTRACT: Performance-based compensation contracts can affect productivity both by motivating effort and by attracting workers whose abilities align best with the offered contracts. Using an experiment in which participants design “rebus puzzles,” this study tests whether the incremental benefits of contract self-selection extend to a multi-dimensional performance environment in which participants choose between a contract that rewards both quantity and creativity versus a contract that rewards quantity only. Findings indicate that participants who choose a creativity-weighted pay scheme perceive themselves to have greater creative potential than those who choose a quantity-only scheme. This perceived creativity advantage manifests itself in the superior initial creativity ratings of such participants’ productive output. However, in the aggregate, participants paid only for quantity eventually surpass the creativity-weighted productivity scores of participants paid for creativity-weighted productivity, whether compensation contracts are self-selected or randomly assigned. Thus, the implications of contract selection on creativity-weighted productivity hinge on the importance of the initial advantage enjoyed by participants who self-select a creativity-weighted contract.

Performance Based Compensation and Direct Earnings Management

There is empirical evidence and supporting theory showing performance-based compensation can motivate accounting based earnings management. Less well studied is the link between such compensation and direct forms of earnings management. In this paper we provide a model demonstrating that performance-based options can encourage a risk averse manager to take decisions to increase the riskiness (or gamble with) of earnings, for example by altering credit sales policies. Such behavior has been bourne out by management in a number of companies recently. The incentive to undertake direct earnings management is stronger when the options are further out-of-the-money with respect to the performance threshold. We find if the performance threshold is low, there may be no incentive to manage earnings, even if such behavior is not penalized. In practice, thresholds are observed to be low. Our model suggests a reason for this is that firms are avoiding managerial gambling with earnings and associated losses in terms of the efficiency of the option compensation.

Environmental Uncertainty, Comprehensive Performance Measurement Systems, Performance-Based Compensation, and Organizational Performance

This study explores firms' use of comprehensive performance measures and performance-based compensation in response to the increasingly uncertain competitive environment. Data from a sample of 84 Taiwanese high-tech manufacturing firms revealed an increased use of such systems among firms facing higher perceived environmental uncertainty. We also found performance-based pay to fully mediate the relationship between comprehensive performance measures and employee effort. Finally, employee effort is significantly and positively associated with organizational performance and fully explains the effect of performance-based compensation in increasing organizational performance.

Performance-based compensation in member-owned firms: An examination of medical group practices

We examine the importance of agency considerations for the mix of salary and performance-based compensation in member-owned medical practices. Performance-based pay increases with the informativeness of clinical productivity measures, and declines with greater reimbursement from capitation contracts. Inexperienced physicians receive more compensation from salary, but compensation mix does not change as physicians near retirement. Larger practices and practices using outside management companies place more weight on performance-based compensation. However, when more physicians in the group practice the same specialty, less emphasis is placed on performance-based compensation. Finally, the presence of an executive partner has no influence on compensation mix.

Measuring and Motivating Quantity, Creativity, or Both

We examine how worker productivity differs when performance-based compensation is based on measures of quantity, creativity, or the product of both measures. In an experimental task in which participants design rebus puzzles, we find that quantity-based compensation increases the number of puzzles produced, and that creativity-based compensation improves average creativity ratings, as evaluated by an independent panel of raters. However, a weighted compensation scheme that rewards the product of quantity and average creativity ratings results in weighted productivity scores that are significantly lower than those generated by participants with quantity incentives alone. Follow-up analysis indicates that relative to participants compensated solely for quantity, participants in the weighted condition produce approximately the same number of high-creativity puzzles, but produce significantly fewer puzzles of mediocre creativity. This finding is consistent with the premise that participants rewarded for creativity-weighted output simplify their objective by restricting their production to high-creativity ideas, but are unable to translate this focus into a greater volume of high-creativity output. Implications address a possible explanation for why firms are reluctant to incorporate creativity measures within multi dimensional performance measurement systems, notwithstanding published suggestions to do so.

EVA versus zisk a korelace s akciovým výnosem akcií

Nespokojenost s tradičními způsoby měření výkonnosti firem pomocí ukazatelů odvozených pouze z účetních výkazů vyústila ve snahu vyvinout alternativy měření výkonnosti podniků, na nichž by bylo možné stavět ukazatele zainteresovanosti manažerů. V souvislosti s teorií zastoupení (agency theory) vzniká problém vztahu "principal - agent" vymezený kontraktem (contract), kdy principál najímá agenta, aby pro něho uskutečňoval určitou službu. Manažeři však nemusí vždy usilovat o co největší přínos pro akcionáře, o maximalizaci akcionářské hodnoty (shareholder value) a o maximalizaci tržní hodnoty (market value) podniku. S tím souvisí otázka, jak sjednotit zájmy obou stran, aby byly minimalizovány náklady zastoupení, a jak stanovit, které měřítko výkonnosti nejlépe vyjadřuje přínos manažerů k hodnotě firmy. Na základě empirického výzkumu autoři zjišťovali a odvozovali "přidanou hodnotu" od ukazatele EVA v konkrétních odvětvích a podnicích v USA. Výsledky jejich zkoumání byly pozitivní a významné v předvídání u firem, které zavedly EVA jako vnitřní výkonnostní měřítko. To vede k závěru, že ukazatel EVA je vhodný jako "bonus base" pro odměňování manažerů. Odměňování manažerů na základě ukazatelů kapitálového trhu, zejména cen akcií, jak požaduje druhá skupina - zastánci tohoto kritéria se nejeví vhodné, protože v ceně akcií se odráží i faktory, které manažeři podniku nemohou ovlivnit (např. inflace, aj.).

The Impact of Performance-Based Compensation on Misreporting

The Impact of Performance-Based Compensation on Misreporting

Governance and performance of microfinance institutions in Central and Eastern Europe and the Newly Independent States

Summary This paper presents the first evidence on the impact of governance on outreach and sustainability of microfinance institutions (MFIs) in Central and Eastern Europe and the Newly Independent States. The results indicate that performance-based compensation of managers is not associated with better-performing MFIs; lower wages suggested for mission-driven organizations worsen outreach, while managers’ experience improves performance. The results also identify tradeoffs between MFI outreach and sustainability depending on stakeholders’ representation on the board and provide strong support for independent boards with limited employee participation. In the study region, external governance mechanisms seemed to play a limited role.

Are Professors' Salaries too High?

Using the model by Vaihekoski (2005), this paper investigates whether professors are over- or underpaid. Empirical analysis is performed using tenured Finnish professors' salary data against the salary and unemployment data for comparable peer employee groups. The results suggest among other things that professors' salaries should vary according to their peer groups' salary. Professors in most of the analyzed disciplines have too low salary, although an example of the opposite was found. Finally, the model suggests that the professors should be compensated with a higher salary on average if their salary is changed to the performance-based compensation system as in Finland from the beginning of 2006.

The impact of performance-based compensation on misreporting

This paper examines the effect of CEO compensation contracts on misreporting. We find that the sensitivity of the CEO's option portfolio to stock price is significantly positively related to the propensity to misreport. We do not find that the sensitivity of other components of CEO compensation, i.e., equity, restricted stock, long-term incentive payouts, and salary plus bonus have any significant impact on the propensity to misreport. Relative to other components of compensation, stock options are associated with stronger incentives to misreport because convexity in CEO wealth introduced by stock options limits the downside risk on detection of the misreporting.

Supervisory Perceptions of the Impact of Public Sector Personnel Practices on the Achievement of Multiple Goals

Strategic human resource management enhances productivity and the effectiveness of organizations. Research shows that when organizations employ such personnel practices as internal career ladders, formal training systems, results-oriented performance appraisal, employment security, employee voice and participation, broadly defined jobs, and performance-based compensation, they are more able to achieve their goals and objectives. Using ordinal regression analyses of data from a survey of North Carolina county social service directors and supervisors, this study examines the extent to which strategic human resource management is perceived to affect outcome assessments (or performance measurements) for welfare reform. Although strategic human resource management practices are perceived to be present, with training and employment security having notable impacts, they clearly are not a predominant feature in North Carolina counties.

The Limitations of Experimental Design: A Case Study Involving Monetary Incentive Effects in Laboratory Markets

We replicate an influential study of monetary incentive effects by Jamal and Sunder (1991) to illustrate the difficulties of drawing causal inferences from a treatment manipulation when other features of the experimental design vary simultaneously. We first show that the Jamal and Sunder (1991) conclusions hinge on one of their laboratory market sessions, conducted only within their fixed-pay condition, that is characterized by a thin market and asymmetric supply and demand curves. When we replicate this structure multiple times under both fixed pay and pay tied to performance, our findings do not support Jamal and Sunder’s (1991) conclusion about the incremental effects of performance-based compensation, suggesting that other features varied in that study likely account for their observed difference. Our ceteris paribus replication leaves us unable to offer any generalized conclusions about the effects of monetary incentives in other market structures, but the broader point is to illustrate that experimental designs that attempt to generalize effects by varying multiple features simultaneously can jeopardize the ability to draw causal inferences about the primary treatment manipulation.

The Prevalence and Characteristics of Incentive Plans for Clinical Productivity Among Academic Anesthesiology Programs

Performance-based compensation is encouraged in medical schools to improve faculty productivity. Medical specialties other than anesthesiology have used financial incentives for clinical work. The goal of this study was to determine the prevalence and the types of clinical incentive plans among academic anesthesiology departments. We performed an electronic survey of the members of the Society of Academic Anesthesiology Chairs and the Association of Anesthesiology Program Directors in the spring of 2003. The survey included questions about departmental size, presence of a clinical incentive plan, characteristics of existing incentive plans, primary quantifiers of productivity, and factors used to modify productivity measurements. An incentive plan was considered to be present if the department measured clinical productivity and varied compensation according to the measurements. The plans were grouped by the primary measure used into the following categories: None, Charges, Time, Shift, Late/Call (only late rooms and call), and Other. Eighty-eight (64%) of 138 programs responded to the survey, and 5 were excluded for incomplete data. Of the responding programs, 29% had no system, 30% used a Late/Call system, 20% used a Shift system, 11% used a Charges system, 6% used a Time system, and 3% fit in the Other category. Larger groups (>40 faculty members) had a significantly more frequent prevalence of incentive plans compared with smaller groups (<20 faculty members). Incentives were paid monthly or quarterly in 85% of the groups. In 90% of groups, incentive payments accounted for <25% of total compensation. Adjustments for operating room schedule supervisors, personally performed cases, day surgery preoperative clinics, pain-management services, and critical care services were included in less than half of the programs that reported incentive plans. Call and late room compensation was based on varied formulas. Sixty-nine percent of academic anesthesiology departments did not vary compensation according to clinical activity during regular hours. Most did vary payments on the basis of call and/or late rooms worked. Larger departments were more likely to use clinical incentive plans.

The Impact of Performance-based Compensation on Misreporting

This paper examines the effect of CEO compensation contracts on misreporting. We find that the sensitivity of the CEO's option portfolio to stock price is significantly positively related to the propensity to misreport. We do not find that the sensitivity of other components of CEO compensation, i.e., equity, restricted stock, long-term incentive payouts and salary and bonus have any significant impact on the propensity to misreport. Relative to other components of compensation, stock options are associated with stronger incentives to misreport because convexity in CEO wealth introduced by stock options limits the downside risk on detection of the misreporting.