scholarly journals Pay for performance: Beating "best practices"

2006 ◽  
Vol 2 (3) ◽  
pp. 36-40
Author(s):  
Marc Hodak
Keyword(s):  
Best Practices ◽  
Executive Compensation ◽  
Empirical Research ◽  
Value Creation ◽  
Pay For Performance ◽  
Public Companies ◽  
Compensation Plans ◽  
Ceo Pay ◽  
Compensation Plan ◽  
Compensation Design

Widespread criticism of CEO pay packages have spurred directors to engage in a diligent search for best practices. This vigilance is transforming the process of executive compensation design, administration and oversight at many major public companies. But have all these process changes improved the compensation plans? We conducted empirical research on the way various compensation structures work for or against shareholder value creation. We looked at S&P 500 executive compensation plan data, supplemented by conversations with hundreds of executives and consultants. Against this standard, the evidence indicates that certain practices prove out favorably; some with plausible rationales have questionable value, at best, and some are clearly counter productive.

Sales Force Compensation Design for Two-Sided Market Platforms

2019 ◽  
Vol 56 (4) ◽  
pp. 666-678 ◽  
Author(s):  
Hemant K. Bhargava ◽  
Olivier Rubel
Keyword(s):  
Network Effects ◽  
Sales Force ◽  
Compensation Plans ◽  
Agency Relationship ◽  
Indirect Network Effects ◽  
Compensation Plan ◽  
Sales Agent ◽  
Sales Compensation ◽  
Sales Agents ◽  
Compensation Design

The authors study the use of sales agents for network mobilization in a two-sided market platform that connects buyers and sellers, and they examine how the presence of direct and indirect network effects influences the design of the sales compensation plan. They employ a principal–agent model in which the firm tasks sales agents to mobilize the side of the platform that it monetizes (i.e., sellers). Specifically, the presence of network effects alters the agency relationship between the firm and the sales agent, requiring the platform firm to alter the compensation design, and the nature of the alteration depends on whether the network effects are direct or indirect and positive or negative. The authors first show how the agent’s compensation plan should account for different types of network effects. They then establish that when the platform firm compensates the agent solely on the basis of network mobilization on the side cultivated by the agent (sellers), as intuition would suggest, it will not fully capitalize on the advantage of positive network effects; that is, profit can be lower under stronger network effects. To overcome this limitation, the platform should link the agent’s pay to a second metric, specifically, network mobilization on the buyer side, even though the agent is not assigned to that side. This design induces a positive relation between the strength of network effects and profit. This research underlines the complexity and richness of network effects and provides managers with new insights regarding the design of sales agents’ compensation plans for platforms.

scholarly journals The Impact of Firm Financial Efficiency on Executive Compensation of United States Apparel Stores Industry: An Application of Panel Data Envelopment Analysis

2018 ◽  
Vol 11 (6) ◽  
pp. 165
Author(s):  
Herman Sahni ◽  
Christian Nsiah
Keyword(s):  
Data Envelopment Analysis ◽  
Executive Compensation ◽  
Pay For Performance ◽  
Scale Efficiency ◽  
Data Envelopment ◽  
Financial Efficiency ◽  
Performance Framework ◽  
The Us ◽  
Ceo Pay ◽  
The Impact

This study examines the effect of firm financial efficiency on executive compensation with an emphasis on the US apparel industry. We find that both annual efficiency levels and cumulative efficiency changes obtained from the Data Envelopment Analysis (DEA) are positively associated with CEO pay. The effect is stronger for technological changes and changes in scale efficiency. Our results seem to support the pay-for-efficiency paradigm, a stricter version of the pay-for-performance framework under the efficient contracting explanation for CEO pay.

scholarly journals What Does “Say on Pay” Say about Audit Risk?

2014 ◽  
Vol 9 (1) ◽  
pp. A1-A12 ◽  
Author(s):  
X. Jasmine Bordere ◽  
Conrad S. Ciccotello ◽  
C. Terry Grant
Keyword(s):  
Executive Compensation ◽  
Audit Fees ◽  
Internal Controls ◽  
Risk Assessments ◽  
Control Group ◽  
Audit Risk ◽  
Say On Pay ◽  
Risk Environments ◽  
Ceo Pay ◽  
Compensation Plan

SUMMARY This paper examines a sample of 36 firms that received a majority of negative shareholder votes on their executive compensation plan in the first round of Dodd-Frank mandated “say-on-pay” voting in 2011. Relative to a control group, the 36 firms tend to perform poorly and have high CEO pay in the pre-vote period, and especially in 2010. We find that about 20 percent of the rejected firms also had income-decreasing restatements that impact the five-year period before the vote, compared to only 3 percent for a control group. The rejected firm sample also has weaker internal controls, as well as greater increases in audit fees in the year before the vote. The voting highlights how rejected firms tend to have higher audit risk environments in the years preceding the say-on-pay vote. In addition, since over half of the restatements occur after the say-on-pay vote, the findings also suggest that auditors should use voting as an input to their risk assessments.

DISCUSSION OF: Examining Shareholder Value Creation over CEO Tenure: A New Approach to Testing Effectiveness of Executive Compensation

2011 ◽  
Vol 23 (1) ◽  
pp. 29-36 ◽  
Author(s):  
Dan Weiss
Keyword(s):  
Executive Compensation ◽  
Performance Studies ◽  
Value Creation ◽  
Stock Options ◽  
Pay For Performance ◽  
Executive Pay ◽  
New Approach ◽  
Ceo Tenure ◽  
Executive Incentives ◽  
Managerial Power

ABSTRACT The executive compensation literature has explored the executive pay-for-performance relation in various contexts and reported mixed findings. As a result, the question of whether executive incentives, and particularly stock options, are effective continues to pose a puzzle to researchers. Gong (2011) uses a long window to examine effectiveness of executive compensation. This note discusses several broad aspects of pay-for-performance studies and their potential manifestation in this line of research and in Gong's study. Specifically, I elaborate on measurement issues and on each of the following aspects: (1) the underlying paradigm: arm's-length contracting versus managerial power; (2) the distinction between the pay-for-performance relationship and CEO overpay; (3) market efficiency; and (4) the settling-up problem.

Comments on two sides of CEO pay injustice

2018 ◽  
Vol 16 (1) ◽  
pp. 107-116
Author(s):  
Martin J. Conyon
Keyword(s):  
Executive Compensation ◽  
Power Law ◽  
Boards Of Directors ◽  
Quantitative Methods ◽  
Pay For Performance ◽  
Critical Evaluation ◽  
Estimation Methods ◽  
Content Type ◽  
Ceo Pay ◽  
Two Sides

Purpose This is a short commentary on Herman Aguinis, Geoffrey Martin, Luis Gomez-Mejia, Ernest Boyle and Harry Joo (2017): “Two sides of CEO pay injustice: A power law conceptualization of CEO over and underpayment.” Design/methodology/approach Using insights from prior studies on executive compensation, the author’s commentary presents a critical evaluation of “Two sides of CEO pay injustice: […].” In addition, the author offers potential avenues for further research. Findings The paper “Two sides of CEO pay injustice” is well executed and makes several significant contributions to the management and executive compensation literature. Particularly, noteworthy are the use of advanced quantitative methods, the use of power law distributions to explain chief executive officer (CEO) pay outcomes, the focus on pay-for-performance and the role of justice in CEO outcomes. The author’s commentary in the present paper discusses the measurement of CEO pay and performance, poses alternative estimation methods to explore the pay-for-performance link and offers thoughts on justice theory in the context of CEO pay. Research limitations/implications The authors’ findings may be briefly stated as CEO pay is better described by a power law distribution than a normal distribution, CEO pay is not linked to firm performance and the patterns of CEO pay does not conform to patterns of distributive justice. Overall, the authors provide an important way to evaluate CEO pay outcomes. Thy set the stage for new avenues of research. Practical implications CEO pay is a highly controversial subject in the domain of corporate governance. This paper offers boards of directors and policymakers a method to better understand the success or failure of boardroom pay policies. Social implications CEO pay is an important social measure. Originality/value The authors’ paper is original by offering a method for determining over and underpayment of CEOs. The author in the present paper makes suggestions on how one might extend the research.

CEO Bonus Pay, Tax Policy, and Earnings Management

2002 ◽  
Vol 24 (s-1) ◽  
pp. 1-23 ◽  
Author(s):  
Austin Reitenga ◽  
Steve Buchheit ◽  
Qin Jennifer Yin ◽  
Terry Baker
Keyword(s):  
Financial Performance ◽  
Executive Compensation ◽  
Financial Reporting ◽  
Tax Policy ◽  
Executive Pay ◽  
Compensation Plans ◽  
Bonus Pay ◽  
Compensation Plan ◽  
Reported Earnings ◽  
Low Pay

In 1993, Congress passed Internal Revenue Code Section 162(m), which eliminated the tax deductibility of nonperformance-based executive compensation over $1 million. Recent research indicates that, as intended, Code Section 162(m) has strengthened the link between executive pay and firm performance. Although 162(m) apparently has changed executive compensation in a way desired by Congress, we hypothesize that 162(m) has indirectly influenced the financial-reporting process. Specifically, we hypothesize and find evidence to support the following: for numerous reasons associated with “qualifying” a compensation plan per Code Section 162(m), executives in firms that qualify their compensation plans receive relatively low pay when their firm's financial performance is extreme. Because these executives receive relatively low pay for extreme financial performance, an incentive exists to smooth reported earnings over time in order to maximize long-term compensation. The relatively smooth earnings patterns that we observe in qualified firms are related to the use of discretionary accruals. Our results appear robust to alternative sampling and modeling techniques. As such, our evidence suggests that a tax policy designed to curb allegedly excessive executive compensation has indirectly affected the quality of reported earnings.

scholarly journals Green Leaf Grocery - Executive Compensation Case Study

2018 ◽  
Vol 14 (1) ◽  
pp. 11-16
Author(s):  
Marcus Z. Cox ◽  
Robert Mitchell Crocker
Keyword(s):  
Executive Compensation ◽  
Initial Public Offering ◽  
Ethical Issues ◽  
Organizational Goals ◽  
Compensation Plans ◽  
Retail Business ◽  
Compensation Plan ◽  
Public Offering

The primary purpose of this teaching case is to aid students in understanding how executive compensation plans are utilized to achieve organizational goals and to then construct their own executive compensation plan for the CEO of Greenleaf Grocery, a fictional retail business based on an actual company. Students have the opportunity to create a comprehensive executive compensation plan using salary, bonuses, stock options, benefits, and other compensation tools.  Additionally, the case provides the opportunity to discuss the use of both short-term and long-term incentive compensation.  The company in this case is poised to undertake an initial public offering of stock and retaining the current CEO is viewed as critical for this next phase.    The case affords the class the opportunity to explore ethical issues in executive compensation as well as other aspects of the organization’s overall compensation structure.  

Executive compensation and securitization: pre-and post-crisis

2014 ◽  
Vol 15 (4) ◽  
pp. 437-457 ◽  
Author(s):  
Elizabeth Cooper ◽  
Andrew Kish
Keyword(s):  
Executive Compensation ◽  
Pay For Performance ◽  
Chief Executive ◽  
Executive Pay ◽  
Pay Gap ◽  
Content Type ◽  
Ceo Pay ◽  
The Difference ◽  
Recent Financial Crisis ◽  
The Relationship

Purpose – The purpose of this paper is to study bank executive compensation and securitization, two important strategic developments in finance that are central to the debate on the cause of the crisis. Design/methodology/approach – We study the relationship between securitization and executive pay in a sample of US banks from 2001 to 2010, using a series of multivariate regression models to test our hypotheses. Findings – Bank Chief Executive Officer (CEO) pay exhibits a positive pay-for-performance relationship. Since the crisis, this relationship is weakened. For banks that securitize, we find that prior to the crisis, higher securitization activity led to higher CEO compensation levels. While we do not find that securitization is related to bank CEO pay gap (the difference between CEO and the next-highest paid bank executive), we do see that bank ratings are a factor in pay gap and compensation level. Research limitations/implications – Bank regulatory ratings influence the relationship between compensation and securitization. Also, the relationship differs pre- and post-crisis. Originality/value – Our study is unique for several reasons. First, we look at the relationship between compensation and securitization over a time period that includes the recent financial crisis. Second, we include an analysis of pay gap. Third, we include bank regulatory ratings, which are proprietary and therefore not available for use in many banking studies.

Customer-centric Compensation Plans: Linking Compensation Plans of Employees in Indian Restaurants with Expectations of Customers

2015 ◽  
Vol 4 (2) ◽  
Author(s):  
Debtanu Lahiri
Keyword(s):  
Pay For Performance ◽  
Exploratory Research ◽  
Priority List ◽  
Compensation Plans ◽  
Customer Expectations ◽  
Customer Preferences ◽  
Variable Pay ◽  
Two Factors ◽  
Customer Segment ◽  
Service Ranking

The paper attempts at establishing alignment between compensation plans for employees in restaurants with customer preferences obtained by means of an exploratory research. The findings of the research indicate that food & beverage, cleanliness & comfort, assurance, personal attention, and special feeling are the dominant factors shaping customer expectations in India. Two different categories of customers were identified based on whether they prioritized dining experience or the tangibles associated with service. Ranking of priorities was done on the basis of the mean scores obtained in each of the factors mentioned above. For customers prioritizing tangibles, Special Feeling obtained the lowest score and featured at the bottom of the list. Food & Beverage, on the other hand, remained the top priority for customers across both categories. For the purpose of designing pay-for-performance plans, restaurants were categorized on the basis of their target customer segment. The percentage of variable pay was decided on two factors, (i) degree of control enjoyed by the employee and (ii) strategic importance of the particular function. The kitchen staffs were assumed to have suitable control over the Food & Beverage factor and the front-house staffs over the factors Assurance, Personal Attention and Special Feeling. To ascertain the strategic importance of a particular factor, the score obtained by it as well as its rank in the priority list were taken into consideration. Following this, suitable parameters for assessing the performance of employees were identified and their relevance discussed in some detail.

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