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Article

Shahbaz Sheikh

The purpose of this paper is to examine if the structure and design of CEO compensation has any effect on firm innovation. It further investigates the effectiveness of…

Abstract

Purpose

The purpose of this paper is to examine if the structure and design of CEO compensation has any effect on firm innovation. It further investigates the effectiveness of each component of portfolio of compensation incentives in encouraging innovation.

Design/methodology/approach

This study uses systems of simultaneous equations to model the interdependence between compensation incentives and measures of firm innovation.

Findings

Results indicate that the pay‐performance sensitivity of the CEO portfolio of compensation incentives is positively related to investment in R&D expenditures, number of patents and citations. Options in general are more effective than stocks. However, within the options portfolio, recently awarded and unvested options are more effective than previously awarded and vested options. Restricted stock is more effective than unrestricted stock.

Research limitations/implications

Measuring innovation output is difficult as innovation could take different forms, including business model innovation, which does not appear in the patent data.

Practical implications

Stock options encourage investment in value‐increasing innovations and should remain a significant part of managerial compensation. If the firm awards stock, it should only award restricted stock.

Originality/value

This study uses comprehensive measures of compensation incentives and firm innovation. It views incentives as a portfolio of stock and options and uses incentives in their entirety. It examines the effectiveness of each component of the portfolio in encouraging innovation. It measures innovation as investment into the innovation process (R&D expenditures) and the resulting success of that investment (patents and citations).

Details

Review of Accounting and Finance, vol. 11 no. 1
Type: Research Article
ISSN: 1475-7702

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Article

Yilin Zhang, Dongling Cai, Fansheng Jia and Guangzhong Li

This paper aims to mainly investigate the role of trust, which is an important informal system, in executive compensation incentives.

Abstract

Purpose

This paper aims to mainly investigate the role of trust, which is an important informal system, in executive compensation incentives.

Design/methodology/approach

Using the data of Chinese A-share private enterprises from 2003 to 2014, the paper estimates the effect that trust has on executive compensation incentives.

Findings

Results indicate that trust can significantly enhance the effectiveness of executive compensation incentives. Furthermore, the better the regional trust environment in which companies are located, the more pronounced the effect is. In particular, the effect of trust on executive compensation incentives is only significant when the formal legal system is immature. As companies continue to grow and develop and the formal system becomes perfect, the role of trust weakens. The formal system, including the corporate governance mechanism and perfect legislation, then becomes the key to promoting executive compensation incentives.

Practical implications

This paper provides evidence of the significance of both informal and formal systems. It not only emphasises the important role that the informal system has played in “the mystery of China’s economic growth” but also supports the “ruling the country by law” strategy for the sustainable development of China’s economy.

Originality/value

This paper reveals the relationship between the formal and informal systems, which provides a new perspective on and empirical evidence for the determinants of executive compensation incentives, and it also finds an explanation for the rapid growth of China’s economic development.

Details

Nankai Business Review International, vol. 10 no. 2
Type: Research Article
ISSN: 2040-8749

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Book part

Jeremy Reynolds

Most research on worker participation treats it as an establishment-level phenomenon even though it is seldom used on an establishment-wide basis. This paper, however…

Abstract

Most research on worker participation treats it as an establishment-level phenomenon even though it is seldom used on an establishment-wide basis. This paper, however, examines how three forms of incentive compensation are used at the job level, and it assesses the potential ramifications for inequality. I find that the use of incentive compensation reflects the gender composition, unionization, and functional role of jobs. Jobs with many full-time women, for instance, are less likely to use group incentives and profit sharing because they are less likely to play central or managerial roles in establishments. This suggests that incentive compensation may increase inequality.

Details

Worker Participation: Current Research and Future Trends
Type: Book
ISBN: 978-0-76231-202-3

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Article

Tom Aabo, Nicholai Theodor Hvistendahl and Jacob Kring

The purpose of this study is to investigate the association between corporate risk and the interaction between CEO incentive compensation and CEO overconfidence.

Abstract

Purpose

The purpose of this study is to investigate the association between corporate risk and the interaction between CEO incentive compensation and CEO overconfidence.

Design/methodology/approach

This empirical study performs random and fixed effect (FE) regression analysis. It uses option-implied measures of CEO overconfidence.

Findings

The authors contribute to the existing literature by showing (1) that the positive association between high CEO incentive compensation and corporate risk only exists in the sphere of overconfident CEOs and (2) that the positive association between overconfident CEOs and corporate risk only exists in the sphere of high CEO incentive compensation. The authors show that the combination of high CEO incentive compensation and CEO overconfidence is associated with an increase in corporate risk of approximately 6% while the individual effects are for all practical reasons negligible. The results imply that only the combination of high CEO incentive compensation and CEO overconfidence is associated with a significantly elevated level of corporate risk.

Research limitations/implications

The findings are based on S&P 1500 non-financial firms in the period 2007–2016.

Practical implications

The findings have important implications in terms of CEO selection and compensation.

Originality/value

This study provides empirical evidence on the importance of the dual presence of high CEO incentive compensation and CEO overconfidence for corporate risk. The previous literature has primarily investigated these phenomena in isolation.

Details

Managerial Finance, vol. 47 no. 2
Type: Research Article
ISSN: 0307-4358

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Article

Suman Basuroy, Kimberly C. Gleason and Yezen H. Kannan

The purpose of this article is to examine whether the design of chief executive officer (CEO) compensation generates incentives to engage in managerial behavior that…

Abstract

Purpose

The purpose of this article is to examine whether the design of chief executive officer (CEO) compensation generates incentives to engage in managerial behavior that enhances customer satisfaction and whether these incentives, in turn, lead to higher firm value.

Design/methodology/approach

A unique dataset combining customer satisfaction and executive compensation data was used, and the relationship between option sensitivity, customer satisfaction and performance was modeled using simultaneous equations modeling with industry and year fixed effects.

Findings

Findings suggest that CEO compensation plays an important role in explaining the variation in customer satisfaction and firm value. Specifically, CEO short-term compensation (salary or bonus) has no affect on customer satisfaction or firm value; the sensitivity of CEO wealth from long-term incentive compensation to stock price changes is positively related and also exhibits an inverted U-shaped relationship with customer satisfaction; the sensitivity of CEO wealth from long-term incentive compensation to stock price changes interacts negatively with CEO longevity and industry concentration but positively with advertising expenses in affecting customer satisfaction; the sensitivity of CEO wealth from long-term incentive compensation to both stock price changes and customer satisfaction positively affect firm value; and the sensitivity of CEO wealth from long-term incentive compensation to stock price changes interacts positively with customer satisfaction to affect firm value.

Research limitations/implications

This study suffers from several limitations. First, the sample is limited to firms with ACSI scores available. Second, this study is limited to only publicly traded firms, which limits our ability to generalize regarding customer satisfaction, option sensitivity and firm value.

Practical implications

This study has several important implications for researchers and managers. The first is that the corporate board appears to view investment in customer satisfaction as similar to an investment in other intangible assets or technology, in that they reward managers with a nonlinear payoff profile. To encourage managers to invest discretionary funds wisely, incentive compensation is important. Second, compensation committees of corporate boards should not allow the option sensitivity to reach extreme levels because, at some point, managers’ incentives appear to shift more toward short-term earnings objectives and away from investment in intangibles, which have a longer-term payoff. Third, if boards are concerned about customer satisfaction and market value, when designing compensation packages, they should shift their focus from the structure of pay to the sensitivity of pay to performance. The exception to this is that for CEOs with very long tenures (or for those close to retirement), high levels of option sensitivity may distort incentives away from a focus on customer satisfaction. Finally, our results indicate that strategies that enhance customer satisfaction provide an incremental benefit in terms of firm value, beyond incentive compensation strategies.

Social implications

The results indicate that a “stakeholder focus” which includes customers is value adding for shareholders as well. The results also imply that perhaps using a “balanced scorecard” approach to assessing performance in terms of customer satisfaction outcomes, or at least acknowledging the drives of customer satisfaction explicitly, could be an alternative to using highly sensitive incentive-based compensation when such compensation schemes are less desirable.

Originality/value

Prior research has found that the structure of fixed versus incentive-based compensation impacts customer satisfaction. However, this is one of the first papers to investigate the relationship between the sensitivity of CEO compensation and customer satisfaction. Findings have important implications for boards who seek to structure CEO pay so that CEOs have incentives to enact policies that benefit customers and, in turn, firm performance.

Details

Review of Accounting and Finance, vol. 13 no. 4
Type: Research Article
ISSN: 1475-7702

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Article

Hyungkee Young Baek and Philip L Fazio

Small public family firms apply contracting differently given the peculiar motivations of founding families and the degree to which they monitor operations. The purpose of…

Abstract

Purpose

Small public family firms apply contracting differently given the peculiar motivations of founding families and the degree to which they monitor operations. The purpose of this paper is to examine the effects of family ownership, control, and CEO dividends on CEO incentive compensation.

Design/methodology/approach

The sample consisted of 194 firms, covering about 40 percent of the relevant S&P SmallCap 600 firms. Employed were a logistic regression of the presence of incentive compensation plan and a panel regression of incentive compensation ratio against the family ownership, family CEO, CEO ownership, and dividend income variables as well as firm-specific and CEO-specific control variables.

Findings

For 1,532 firm-year observations among S&P SmallCap600 index firms during 1999-2007, the authors found that family ownership and CEO dividend income ratio negatively related to the likelihood of an incentive compensation plan and to the ratio of equity-based compensation to total CEO pay. Additionally, the effect of CEO dividend income was limited to firms with outside CEOs.

Practical implications

Boards of small capitalization firms should consider the incentive effects of CEO dividend income and CEO family membership when setting their compensation policies.

Originality/value

S&P SmallCap600 index firms are unique because they are much smaller than those listed in the S&P 500 or the Fortune 500, and are subject to more family influence. SmallCap firms are comparable in size to the foreign firms previously researched but are still well covered by analysts, and benefit from audited financial statement variables, which include dividends and stock market returns.

Details

Journal of Family Business Management, vol. 5 no. 1
Type: Research Article
ISSN: 2043-6238

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Book part

Sung S. Kwon

This chapter examines the sensitivity of executive incentive compensation to market-adjusted returns and changes in earnings for high-tech (HT) firms vis-à-vis firms (NHT…

Abstract

This chapter examines the sensitivity of executive incentive compensation to market-adjusted returns and changes in earnings for high-tech (HT) firms vis-à-vis firms (NHT) in other industries. Consistent with the hypotheses, this chapter uncovers the following evidence: First, the sensitivity of executive bonus compensation to market-adjusted returns is weaker and more symmetric for HT firms than for NHT firms (a control group), which implies that the problem of ex post settling up, documented in Leone et al. (2006), may be far less serious in HT firms than in NHT firms. Second, the sensitivity of executive incentive compensation to earnings changes is generally more symmetric for HT firms than for NHT firms, which is consistent with the view that HT firms engage in more conservative financial reporting than NHT firms. Third, the sensitivity of executive equity-based compensation to market-adjusted returns is significantly negative for HT firms compared to NHT firms when bad earnings news is announced. The results imply that HT firms, with a strong motive to attract and retain their highly talented executives, judiciously use both short-term and long-term incentive compensation schemes by compensating for a reduction of short-term incentive pay with an increase in long-term incentive pay. The issue of executive compensation has been a longstanding one in the United States and Canada, and the issue of executive compensation-performance sensitivity for HT firms is also relevant in this era of the information technology (IT) revolution, especially when prior research has shown that HT firms differ from NHT firms in their market-valuation process.

Details

Transparency and Governance in a Global World
Type: Book
ISBN: 978-1-78052-764-2

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Article

Yong Liu, Zhi-yang Liu and Jiao Li

The purpose of this paper is an attempt to design a proper incentive coordination mechanism to deal with the channel conflicts between the traditional sales and online…

Abstract

Purpose

The purpose of this paper is an attempt to design a proper incentive coordination mechanism to deal with the channel conflicts between the traditional sales and online direct sales.

Design/methodology/approach

With respect to the problems of channel conflicts between the traditional sales and online direct sales, to optimize the sale system and get more profits, considering the influences of consumer network acceptance, the authors establish demand and profit function based on consumer's utility, respectively. What's more, we exploit the game theory to analyze the optional decisions of the supply chain under the incentive coordination condition and no incentive coordination condition, and then we discuss the supply chain's optimal pricing, demand, profit and compensation incentive levels with the different effect of consumer network acceptance.

Findings

The level of compensation incentive provided by the manufacturer is influenced by consumer network acceptance and product cost. The lower the consumer network acceptance, the better the compensation incentive coordination effect of manufacturers. Manufacturers, wholesalers, retailers and consumers are all important players in real supply chain relationships. When a manufacturer exists as a dominant role, it should pay full attention to the impact of consumer behavior on supply chain decisions.

Practical implications

The research can clarify the influence and mechanism of consumer behavior on supply chain channel conflict coordination, and deal with channel conflicts.

Originality/value

The proposed incentive coordination can effectively realize supply chain channel conflict resolution, and provide decision-making ideas and methods for manufacturers to develop the supply chain management of online direct sales channels.

Details

Asia Pacific Journal of Marketing and Logistics, vol. 33 no. 3
Type: Research Article
ISSN: 1355-5855

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Book part

Zhan Furner, Keith Walker and Jon Durrant

Krull (2004) finds that US multinational corporations (MNCs) increase amounts designated as permanently reinvested earnings (PRE) to maximize reported after-tax earnings…

Abstract

Krull (2004) finds that US multinational corporations (MNCs) increase amounts designated as permanently reinvested earnings (PRE) to maximize reported after-tax earnings and meet earnings targets. We extend this research by examining the relationship between executive equity compensation and the opportunistic use of PRE by US MNCs, and the market reaction to earnings management using PRE designations. Firms use equity compensation to incentivize executives to strive for maximum shareholder wealth. One unintended consequence is that executives may engage in earnings management activities to increase their equity compensation. In this study, we examine whether the equity incentives of management are associated with an increased use of PRE. We predict and find strong evidence that the changes in PRE are positively associated with the portion of top managers' compensation that is tied to stock performance. In addition, we find this relationship to be strongest for firms that meet or beat forecasts, but only with the use of PRE to inflate income, suggesting that equity compensation incentivizes managers to opportunistically use PRE, especially to meet analyst forecasts.

Further, we provide evidence that investors react negatively to beating analysts' forecasts with the use of PRE, suggesting that investors find this behavior opportunistic and not fully convincing. This chapter makes an important contribution to what we know about the joint effects of tax policy, generally accepted accounting principles, and incentive compensation on the earnings reporting process.

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Article

Esra Memili, Kaustav Misra, Erick P.C. Chang and James J. Chrisman

The purpose of this paper is to use the socio‐emotional wealth perspective to examine how the level of family involvement reduces the propensity to use incentives to…

Abstract

Purpose

The purpose of this paper is to use the socio‐emotional wealth perspective to examine how the level of family involvement reduces the propensity to use incentives to non‐family managers in small to medium‐sized enterprises (SME) family firms.Design/methodology/approach – Primary data were collected from US firms. To evaluate the hypotheses, a logit model was employed on a final sample of 2,019 small family firms.

Findings

Results suggest that family influence and control and intra‐family transgenerational succession intentions are negatively related to the propensity to use incentives. Also, the interaction effects of family management and ownership reduce the propensity to use incentives.

Originality/value

The paper’s empirical findings imply that despite their potential economic benefits, family involvement reduces the probability that incentives will be offered to non‐family managers because such incentives are perceived to be inconsistent with the preservation of the family’s socioemotional wealth. Also, choices that reflect a preference for socioemotional wealth may not only be a function of decision framing and loss aversion but also by the size of the economic pay‐offs that might be available. The findings suggest that non‐family managers in SME family firms may be affected by a family’s preoccupation with its socioemotional endowments. Thus, the authors expect that this paper provides further avenues to explore the decisions about attaining non‐economic and economic goals and other strategic issues in family firms.

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