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Following the optimal contracting hypothesis, this study investigates the issue of whether the board of director's ex ante choice to incorporate individual performance evaluation (IPE) measures into the CEO bonus plan rewards managerial decisions not reflected in measures of the firm's current financial performance. Empirical results provide evidence that the use of IPE in the CEO bonus plan is an increasing function of the proportion of outsider directors on the board and a decreasing function of the informativeness of financial performance measures. This study also demonstrates how the use of IPE in incentive contracting can explain CEO cash compensation that is not explained by the firm's current performance and governance variables. Finally, the CEO incentive cash compensation not explained by observable performance measures or governance structure is positively associated with firm future performance one year after its award. Overall, results support the optimal contracting hypothesis. IPE appears to be used to increase the informativeness of CEO actions and determine the level of current CEO cash incentive compensation.

This study examines the effects of narcissism and bonus-based incentive plans on managerial decision-making performance. Using an experiment, the authors first examine decision choices under two levels of an incentive threshold (high and low). Narcissism is measured using the Narcissistic Personality Inventory (NPI). Typically, the NPI is used as a single monolithic construct in analyses; however, in this study, the authors subdivide it in two ways to gain more nuanced information about its impact on decision making. First, the authors split the NPI into three levels – high, medium, and low (Hascalovitz & Obhi, 2015), and then decompose it into its adaptive and maladaptive components (Campbell, Hoffman, Campbell, & Marchisio, 2011) to examine how these subdivisions affect performance. Results show that the different levels of incentive thresholds affect performance among narcissistic individuals. Results indicate that individuals higher in narcissism and higher in levels of adaptive and maladaptive narcissism outperform their low-trait counterparts in a lower-threshold environment, but not in a high threshold environment.

Many argue that the design of compensation contracts for public company chief executive officers (CEOs) is often not guided by a goal of value maximization. Yet, there is limited direct empirical evidence on the negative consequences of the proposed inefficient contracting between shareholders and CEOs. Using data on CEO bonus contracts of the S&P 500 firms, we investigate potential firm performance implications of the use of qualitative criteria such as leadership and mentoring in those contracts. We maintain that unlike quantitative criteria, qualitative criteria are difficult to define and measure on an objective basis, possibly resulting in an inefficient and biased incentive structure. Twenty-five percent of the sample observations have CEO bonus contracts that include a qualitative criterion for bonus payment determination. Our results show that employee productivity, asset productivity, capital expenditures, and future abnormal stock returns are lower for firms that use a qualitative criterion in CEO bonus contracts than those that do not. Further, contrary to the argument in prior literature that earnings management decreases with the use of subjective performance indicators in incentive contracts, we find that income-increasing accruals are actually higher when the CEO bonus contract includes a qualitative criterion. We recommend that compensation committees set concrete, measurable performance goals for CEOs, providing CEOs with better guidance and helping improve their corporate decision making.

Bonus depreciation was enacted by the United States Congress and signed into law in 2002 largely in response to the economic malaise that engulfed the U.S. economy after the September 11, 2001 terrorist attacks. We investigate whether bonus depreciation, a capital asset expensing allowance under the U.S. federal income tax code, impacts the level of business investment in property, plant, and equipment in the time periods that followed 9-11 in comparison to other earlier time periods. Based on the empirical evidence, the bonus depreciation policy has a positive effect on capital expenditures only in the period in which this policy was legislatively anticipated, specifically the period spanning the last quarter of 2001 and the first quarter of 2002. Otherwise, we find no significant increase in capital expenditures during the period that this special depreciation provision policy is initially in place from 2002 to 2005. Although bonus depreciation is re-enacted in response to the fiscal distress and recession that began in 2007, capital expenditures actually decline during the recovery era, a period following the post-2008 subprime mortgage crisis. Though Congress continues to temporarily re-enact bonus depreciation on an annual basis through December 31, 2014, there is no strong evidence that capital investment is positively impacted. Instead, the empirical results show that factors that positively affect the level of companies’ capital expenditures include capital intensity, cost of capital, amount of cash holdings, changes in sales and loans. Our empirical results invite the question of Congress’ intended goal in re-instating bonus depreciation for 2015 through 2019.

In this chapter, we examine the impact of pay-for-performance incentives on learning-by-doing. We exploit personnel data on fruit pickers paid under two distinct compensation contracts: a standard piece rate plan and one with an extra one-time bonus tied to output. Under the latter, we observe bunching of performance just above the bonus threshold, suggesting workers distort their behavior in response to the discrete bonus. Such bunching behavior increases as workers gain experience. At the same time, the bonus contract induces considerable learning-by-doing for workers throughout the productivity distribution who presumably hope to one day hit the target, and these improvements significantly outweigh the losses to the firm from the bunching. In contrast, under the standard piece rate contract, we find minimal evidence of bunching and only small performance improvements at the bottom of the productivity distribution. Our results suggest that contract design can help foster learning on the job, underscoring the importance of dynamic considerations in principle-agent models.

Research on weighting of measures often examines only one incentive at a time (usually bonus) and provide mixed findings regarding the relevance of non-financial performance (NFM) measures to evaluate and reward long-term time horizon employees. Using proprietary data from an auto dealership organization, we show that financial measures (FM) are weighted more for bonus than they are weighted for merit raise and promotion but NFM are weighted more than FM for merit raise and promotion. Thus, the temporal orientations of the measures and incentives seem to be aligned: the short-term (long-term) nature of FM (NFM) parallel’s the time horizon of the incentives. Next, our exploratory research questions find that for bonuses, both FM and NFM exert similar levels of significant and positive influence on junior and senior managers. But for promotions, the influence of FM is insignificant for both groups. In contrast, the influence of NFM on promotions is not only significant for both groups but is significantly greater for junior managers than it is for senior managers. That is, the evaluations of NFM for senior managers are less influential on their promotion than they are for junior managers suggesting that promotions for senior managers are often based on factors other than their formal performances.

This chapter examines and discusses the unintended outcomes of the production bonus scheme the mine had instituted to motivate and increase the productivity of the frontline mining teams. This is crucial given that the maladministration of the bonus system could lead to a range of undesired outcomes such as deteriorating levels of trust between management and frontline workers, prioritisation of production at the expense of safety, poor work relations and ultimately low levels of organisational, employee and team performance. There are a number of organisational, management and labour factors that can render a production bonus scheme effective or ineffective. These factors influence the nature and extent of worker reactions to the bonus scheme.

This chapter examines and discusses the factors that influenced the reaction of the mining teams to the team-based production bonus scheme and the extent to which mine management fulfilled its side of the bargain in the implementation of the production bonus. The chapter highlights the manner in which the team-based bonus system influenced teams of stope workers to engage in their informal organisational practice of making plan (planisa) in order to offset the snags that jeopardised their prospects of earning the production bonus. The chapter reveals that, to a large extent, the productivity bonus generated conflict rather than cooperation at the point of production down the mine. As a result, the incentive scheme failed to live up to expectations by not eliciting the desired levels of organisational, worker and team performance at the rock-face.

In many countries that allow unsolicited proposals (USPs) for public–private partnership (PPP) projects, incentives are awarded to the initial proponent of the USP projects during the tendering process as rewards for initially making a proposal. Because of such a reward system, including the bonus system, USPs are commonly known to involve fewer tender participants. This paper aims to investigate the empirical relationship between the number of tender participants and the institutional factors of PPPs. Specifically, two institutional factors are examined: the use of USPs and the bonus system for initial USP proponents.

The ordinary least squares (OLS) and Poisson regression analysis is used in this study to analyze PPP data in South Korea.

This paper demonstrated that USP projects have fewer bidders participating in tenders than solicited projects. Meanwhile, the analysis showed that the bonus system as another component of the institutional framework did not account for the number of bidders in tendering. In the analysis by three different facility types (“Roads,” “Environmental facilities” and “Other” types) of whether the bonus system discouraged participation in the bidding, the authors found heterogeneous responses among the types. For “Roads” and “Other” types of projects, the existence of the bonus system reduced the number of bidders for USP projects, while for “Environmental facilities,” there was no negative relationship between bonus points and the number of bidders. In the analysis of whether there were fewer bidders when no bonus points were awarded, there was no statistically significant difference in the number of bidders for “Roads” and “Environmental facilities.”

This study shows the possibility that other institutional factors apart from bonus points affect competition. The characteristic factors of USPs can affect the decision to participate in the tender from the perspective of potential bidders.

Recent studies on USPs have mainly focused on the strategies that ensure the effective management of USPs for PPP implementation. However, quantitative effects of USPs on the tendering process have not yet been addressed. The quantitative effect refers to something that may be estimated by quantity or that relates to the describing or measuring of quantity, such as the present attempt to account for the number of bidders.

The purpose of this paper is to analyze the effect of managers’ incentive bonuses on both accrual and real earnings management.

First, the authors investigate the relationship between managers’ bonuses and both accrual earnings management (measured by a modified Jones model) and real earnings management (measured by Roychowdhury proxies). Next, the authors examine whether management has any preferences for earnings management methods to enhance its bonuses. Finally, the authors investigate the possible effects of earnings management on future operating performance. The sample consists of compositional data in the period from 2006 to 2012.

The authors find a negative relationship between real earnings management and managers’ bonuses and detect that managers prefer to use accrual earnings management to earn more bonuses. The results also show that real earnings management will reduce a firm’s performance in future periods, and on the other hand that increasing managers’ bonuses links to improvement of the firm’s future performance. The results suggest that managers are typically aware of the negative effects of real earnings management on the firm’s future performance and thus prefer to improve the firm’s performance in securing their bonuses when their ability to manage accruals is constrained.

The implications of this paper provide further evidence on how managers’ bonuses affect their discretion in using accrual and real earnings management. This finding is important to investors and regulators.

This study examines how cash and stock bonus compensations influence top executives to allocate a firm's resources to fixed intangible assets investment and the extent to which this relationship is conditional on executives' ownership, firm growth, internal cash flow and leverage.

Using data from 213 non-financial and non-utility UK FTSE 350 firms for the period 2007–2015, generating a total of 1,748 firm-year observations, panel econometric methods are employed to test the authors’ model.

The authors observe that executives' cash bonus compensation positively impacts fixed intangible assets investment. However, executives' stock bonus compensation has a negative and significant influence on fixed intangible assets. The authors further observe that executives either cash bonus or stock bonus crucially invest more in fixed intangible assets when the firm has a growth potential. Also, both cash bonus and stock bonus executives in firms with lower internal cash flow spend less on fixed intangible assets. Similar results are also observed for those stock bonus-motivated executives with an increase in fixed intangible assets for low leverage firms but a decrease for high leverage ones.

A key limitation of this study is its concentration on a single country (United Kingdom). Thus, future studies can expand the focus of this study by looking at it from the perspective of multiple countries.

The practical relevance of the study results is that firms with high growth opportunity in fixed intangible assets activity can use more cash bonus compensation (risk-avoiding incentive) to induce corporate executives to invest more in such activity. This finding is particularly important given the increasing appetite of firms in this knowledge-based economy to create expansion through fixed intangible assets investment. That is, for firms to increase fixed intangible assets investment, this study suggests that executive cash bonus compensation cannot be ignored.

While this paper builds on the classic Q theory of investment literature, it is the first – to the best of the authors’ knowledge – to explore how cash and stock bonus compensations influence top executives to allocate a firm's resources to fixed intangible assets investment and the extent to which this relationship is conditional on executives' ownership, firm growth, internal cash flow and leverage.