Fair and Square: A Retention Model of Managerial Compensation

We propose a model of how the retention motive shapes managerial compensation contracts. Once employed, a risk-averse manager acquires imperfectly portable skills whose value is stochastic because of industry-wide demand shocks. The manager’s actions are uncontractible, and the perceived fairness of the compensation contract affects the manager’s motivation. If the volatility of profits is sufficiently large and outside offers are sufficiently likely, the equilibrium contract combines a salary with an own-firm stock option. The model’s predictions are consistent with empirical regularities concerning contractual shape, the magnitude of variable pay, the lack of indexation, and the prevalence of discretionary severance pay. This paper was accepted by Axel Ockenfels, behavioral economics and decision analysis.

Clawback Provisions in Executive Compensation Contracts

Clawbacks are contractual provisions in executive compensation contracts that allow for an ex post recoupment of variable pay if certain triggering conditions are met. As a result of regulatory responses to financial crises and corporate scandals, as well as growing shareholder pressure to implement effective measures against executive misbehaviour, the prevalence of such clauses has risen considerably in the recent past, beginning in the US after the 2000 financial crisis. As clawbacks have become a buzzword in the European debate about also ensuring good corporate governance beyond the financial sector, it is time to critically discuss the hopes that have been associated with various types of such provisions.

The Comprehensive Effects of Sales Force Management: A Dynamic Structural Analysis of Selection, Compensation, and Training

This study provides a comprehensive model of an agent’s behavior in response to multiple sales management instruments, including compensation, recruiting/termination, and training. The model takes into account many of the key elements that constitute a realistic sales force setting: allocation of effort, forward-looking behavior, present bias, training effectiveness, and employee selection and attrition. By understanding how these elements jointly affect agents’ behavior, the study provides guidance on the optimal design of sales management policies. A field validation, by comparing counterfactual and actual outcomes under a new policy, attests to the accuracy of the model. The results demonstrate a tradeoff between adjusting fixed and variable pay; how sales training serves as an alternative to compensation; a potential drawback of hiring high-performing, experienced salespeople; and how utilizing a leave package leads to sales force restructuring. In addition, the study offers a key methodological contribution by providing formal identification conditions for hyperbolic time preference. The key to identification is that under a multiperiod nonlinear incentive system, an agent’s proximity to a goal affects only future payoffs in nonpecuniary benefit periods, providing exclusion restrictions on the current payoff. This paper was accepted by Matthew Shum, marketing.

The perspectives of variable pay in Croatia

Variable pay can have numerous benefits for the employee and the employer, however, the overall effect of variable pay will depend upon employee attitudes and preferences towards such form of compensation. Considering that reward systems in Croatia traditionally used the equality principle, the objective of this paper is to examine the role of variable pay from both employee and employer perspectives. Research results are based on a Delphi research of employee attitudes about variable pay and empirical investigation of actual employers’ variable pay practices. The Delphi study results indicate a lack of consensus about employees’ preferences for variable pay in Croatia. However, practice shows that some form of individual variable pay has been adopted by most examined companies. There is some gap between preferences for variable pay and actual compensation practices so this paper identifies conditions under which acceptance of variable pay can be improved.

INFLUENCE OF CONTINGENT PAY AND VARIABLE PAY ON EMPLOYEES PERFORMANCE OF PUBLIC TERTIARY INSTITUTIONS

This study was to examine the influence of contingent pay and variable pay on employee performance in selected public universities. The study was anchored on social exchange theory. A cross sectional survey research design was employed for the study. Stratified sampling techniques were used to obtain a sample of 354 out of a target population of 4658 using Krejcie and Morgan (1970) formula. Data were collected using a structured questionnaire. The study used expert judgment method to determine content validity. Data were analyzed using Pearson’s product moment correlation coefficient at 5% level of significance. The findings revealed that there was a significant positive relationship existing between contingent pay and altruism and there was a significant positive relationship existing between variable pay and employee retention. The study concluded that contingent pay and variable pay has a significant positive relationship with employee performance variables (altruism and employee retention) in the public universities studied. The study recommended that universities administration should take into account the performance of people when granting pay system, as this will help them to motivate employees to try their best and stay longer in organizations.

Employees of Greatness: Signifying Values in Performance Appraisal Criteria

The spread of performance-based and variable pay systems has affected expectations on employee contributions and remuneration, which have become increasingly personalized and individualized. Based on a theoretical valuation studies approach, this study of performance-based pay systems in Sweden shows that performance appraisals are (e)valuations of employees’ yearly performance in which they are prized and (ap)praised at the same time. Through a document analysis of performance criteria from four organizations, the study analyzes how values expressed refer to Boltanski and Thévenot’s six orders of worth. The analysis resulted in a theoretical construction of a joint ideal of Employees of Greatness, against which employees are measured and remunerated. The existence of the ideal of employee greatness is explained by the increasing congruence of organizational ideals in private and public sectors, as principles from emotional and cognitive forms of capitalist organization are superimposed on traditional industrial capitalist organizational ideals.

‘We Are All in This Together’. Collective Bonuses and Incentives in the United Kingdom and Europe: The Real Performance-Related Pay?

‘We are all in this together’ has been a common leadership cry during the coronavirus crisis. But do their rewards designs generally reinforce collective performance? Why have collective bonus and incentive plans made little headway in Europe and what is the evidence on their effectiveness? The author presents findings from a bonus and incentive research review carried out for a major oil company. He found two-thirds of companies operate variable pay plans, with three-quarters of them based on individual performance. Collective plans are, however, spreading in incidence. The research literature he found replicates the North American evidence, indicating collective schemes are associated with higher performance across a variety of metrics. But they are not universally successful. Risks include diminishing effectiveness over time and lack of employee understanding. The research highlights success depends on tailoring to suit the culture and using a range of high-performance work practices. The author concludes success is more likely where collective plans are viewed ‘not just as a vehicle for disseminating incentives but for imparting a sense of shared ownership’.

Institutional shareholding as a corporate governance mechanism that drives Chief Executive Officer pay

We explore the effect of institutional directors on Chief Executive Officer (CEO) pay (total, fixed, and variable compensation). We delve particularly into the impact of pressure-sensitive and pressure-resistant institutional directors, who, respectively, represent institutional investors who maintain and investors who do not maintain a business relationship with the firm whose board they serve on. Focusing on CEO total pay, the findings show that institutional and pressure-resistant directors on boards behave similarly, affecting CEO total pay in a nonlinear way: as the presence of institutional and pressure-resistant directors on boards increases, the monitoring hypothesis prevails, and subsequently, better corporate governance decreases CEO total pay. However, when their presence on boards exceeds a critical point, the entrenchment hypothesis holds, thereby leading to an increase in CEO total pay. Contrary to our predictions, pressure-sensitive directors do not affect CEO total pay. Regarding the CEO’s compensation structure (fixed and variable), the results suggest that institutional and pressure-resistant directors increase fixed compensation and reduce variable pay, while pressure-sensitive directors affect neither fixed nor variable compensation. This evidence supports the view that institutional directors should be considered as a heterogeneous collective. JEL CLASSIFICATION: G3, G34, M12

THE PREVALENCE OF PERFORMANCE-RELATED PAY: A 23-COUNTRY EXAMINATION

This study intends to determine the current situation regarding the prevalence of pay for performance systems established for managers. Examining performance-related pay, we focus on individual, team and organizational performance and explore how widespread several pay components are in 23 countries. The research consists of the firm-level data of 5217 large companies from 23 countries from the Cranfield Network on Comparative Human Resource Management database. The data has been presented descriptively via frequencies and percentages and then analyzed via cluster analysis. In this way, diverging country clusters have been determined regarding the prevalence of pay for performance. Findings show that individual bonus is the most frequently used variable pay component provided to managers in general. Following that, paying for organizational performance is highly prevalent, whereas team-based bonuses are rarely used as a whole. On the other hand, long term incentives are rarely used except profit sharing. The results are descriptive in nature. This study addresses how widespread performance-related pay in various countries. Evidence regarding the use and prevalence of pay for performance systems across countries is quite limited. So this research, reflecting the current scene regarding variable pay in various countries, contributes to current literature by presenting recent comparable data.