scholarly journals Subjective Performance Measures in Optimal Incentive Contracts

10.3386/w4480 ◽  
1993 ◽  
Author(s):  
George Baker ◽  
Robert Gibbons ◽  
Kevin Murphy
Keyword(s):  
Performance Measures ◽  
Incentive Contracts

Board Committee Overlap and the Use of Earnings in CEO Compensation Contracts

2022 ◽  
Author(s):  
Mary Ellen Carter ◽  
Luann J. Lynch ◽  
Melissa A. Martin
Keyword(s):  
Earnings Management ◽  
Performance Measures ◽  
Ceo Compensation ◽  
Incentive Contracts ◽  
Audit Committees ◽  
Implicit Relation ◽  
Compensation Contracts ◽  
Potential Alternative ◽  
Larger Sample

Using proxy statement data describing the terms of compensation contracts, we examine how overlapping membership between compensation and audit committees influences the use of earnings metrics in compensation. Although research predicts that such overlap could either increase or decrease the reliance on earnings, we find that firms with overlapping directors rely less on earnings-based performance measures in incentive contracts without altering the overall level of performance-contingent cash bonuses. In addition, we provide evidence that firms substitute earnings measures with measures less subject to earnings management. Our findings are robust to potential alternative explanations, extend to an implicit relation between earnings and compensation for a larger sample, and are not driven by the tendency toward an overlapping committee structure more broadly. This paper was accepted by Suraj Srinivasan, accounting.

scholarly journals Relational Incentive Contracts

2003 ◽  
Vol 93 (3) ◽  
pp. 835-857 ◽  
Author(s):  
Jonathan Levin
Keyword(s):  
Moral Hazard ◽  
Performance Measures ◽  
Poor Performance ◽  
Incentive Contracts ◽  
Relational Contracts ◽  
Hidden Information ◽  
Optimal Contracts ◽  
Incentive Theory ◽  
Self Enforcement ◽  
Stationary Form

Standard incentive theory models provide a rich framework for studying informational problems but assume that contracts can be perfectly enforced. This paper studies the design of self-enforced relational contracts. I show that optimal contracts often can take a simple stationary form, but that self-enforcement restricts promised compensation and affects incentive provision. With hidden information, it may be optimal for an agent to supply the same inefficient effort regardless of cost conditions. With moral hazard, optimal contracts involve just two levels of compensation. This is true even if performance measures are subjective, in which case optimal contracts terminate following poor performance.

Discretion in Bonus Plans

2010 ◽  
Vol 85 (6) ◽  
pp. 1921-1949 ◽  
Author(s):  
Merle Ederhof
Keyword(s):  
Financial Performance ◽  
Performance Measures ◽  
Empirical Support ◽  
Performance Measure ◽  
Incentive Contracts ◽  
Bonus Payments ◽  
Medium Range ◽  
Primary Hypothesis ◽  
Discretionary Bonuses ◽  
Bonus Plans

ABSTRACT: This study examines discretionary bonus payments by firms to senior-level executives. Interpreting discretionary bonuses as the result of implicit incentive contracts, I analyze an analytical model that includes a contractible and a non-contractible performance measure. The model yields the primary hypothesis that discretionary bonuses occur when the outcome of the contractible measure is either low or high, but not when the contractible outcome falls in the medium range. Based on a sample collected from public sources, I find empirical support for the notion that discretionary bonuses are paid based on non-contractible performance measures that are related to future financial performance. Moreover, discretionary bonus payments occur significantly more often when the contractible performance measure falls in the tails of the distribution. In contrast, I do not find support for the predictions that discretionary bonus payments are related to the manipulability of the contractible performance measures or that discretionary bonus payments are related to the power of the executives in the companies.

Knowledge Sharing and Incentive Design in Production Environments: Theory and Evidence

2009 ◽  
Vol 84 (4) ◽  
pp. 1145-1170 ◽  
Author(s):  
Yuhchang Hwang ◽  
David H. Erkens ◽  
John H. Evans
Keyword(s):  
Knowledge Sharing ◽  
Performance Measures ◽  
Incentive Contracts ◽  
Incentive Design ◽  
Specific Knowledge ◽  
Manufacturing Plants ◽  
Value Of Knowledge ◽  
Output Performance ◽  
Production Environments ◽  
Parsimonious Model

ABSTRACT: We develop and empirically test a parsimonious model of how specific knowledge and the value of knowledge sharing influence manufacturing plants' incentive design choices. Our results confirm the prediction that increases in the extent of agents' specific knowledge and the value of knowledge sharing are associated with greater (less) reliance on output (input) performance measures. Moreover, consistent with our model's prediction, we find that plants rely more on group-based (as opposed to individual-based) output performance measures when the value of knowledge sharing is higher, or the extent of agents' specific knowledge is lower. Finally, consistent with previous research, we find that as output performance measures become noisier, firms rely less on these measures in incentive contracts.

Uncertainty, Legal Liability, and Incentive Contracts

2006 ◽  
Vol 81 (5) ◽  
pp. 1045-1071 ◽  
Author(s):  
John H. Evans ◽  
Kyonghee Kim ◽  
Nandu J. Nagarajan
Keyword(s):  
Moral Hazard ◽  
Performance Measures ◽  
Hazard Analysis ◽  
Legal Liability ◽  
Incentive Contracts ◽  
Uncertain Environments ◽  
Empirical Results ◽  
Task Uncertainty ◽  
New Evidence ◽  
Cost Risk

To address agents' moral hazard over effort, incentive contracts impose risk on the agents. As performance measures become noisier, the conventional agency analysis predicts that principals will reduce the incentive weights assigned to such measures. However, prior empirical results (Prendergast 2002) frequently find the opposite, i.e., incentive weights are larger (agents bear more risk) in more uncertain environments. This paper provides new evidence on the association between the extent of uncertainty and the level of risk imposed on agents. In the context of contracts between managed care organizations and physicians, we examine the effect of task characteristics and the legal liability environment on the extent of risk that physicians bear. We derive the optimal weighting of multiple performance measures in a model of a physician's choice of revenue-generating and cost-control efforts. The model predicts that physicians who face less task uncertainty bear more cost risk in their contracts, as predicted by the conventional moral hazard model. Likewise, the model predicts that as the association between task uncertainty and legal liability uncertainty becomes stronger, physicians bear less cost risk in their contracts. Our empirical results generally support these predictions. We offer an explanation for why these results tend to be consistent with the conventional moral hazard analysis, contrary to empirical results in a number of previous studies.

Performance Measure Properties and the Effect of Incentive Contracts

2006 ◽  
Vol 18 (1) ◽  
pp. 55-75 ◽  
Author(s):  
Jan Bouwens ◽  
Laurence van Lent
Keyword(s):  
Performance Measures ◽  
Organizational Context ◽  
Employee Selection ◽  
Contract Design ◽  
Performance Measure ◽  
Incentive Contracts ◽  
Third Party ◽  
Selection Effects ◽  
Design Characteristics ◽  
Using Data

Using data from a third-party survey on compensation practices at 151 Dutch firms, we show that less noisy or distorted performance measures and higher cash bonuses are associated with improved employee selection and better-directed effort. Specifically, (1) an increase in the cash bonus increases the perceived selection effects of incentive contracts, but does not independently affect the perceived amount and direction of effort that employees deliver, and (2) performance measure properties directly impact both effort and the selection functioning of incentive contracts. These results hold after controlling for an array of incentive contract design characteristics and for differences in organizational context. Our estimation procedures address several known problems with using secondary datasets.

Sign in / Sign up

Export Citation Format

Share Document