Browsing by Subject "Performance awards"
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Item Incentive problems and the structure of executive compensation: theoretical and empirical evidence(Texas Tech University, 1993-08) Alangar, Sadhana M.Empirical studies on compensation schemes indicate that stock prices react positively to the introduction of performance-based compensations. The reason given for this positive reaction is that a performance-based component would induce the manager to reduce perk consumption. The argument is presumably based on agency explanations of Jensen and Meckling (1976). In their seminal article on agency theory, Jensen and Meckling (1976) show that agency problems between stockholders and manager arise when the manager decides to raise outside equity capital. They also show that the value of the firm would decrease as the proportion of management equity ownership decreases. It is assumed, therefore, in the compensation Uteramre that the value of the firm would increase as the performance-based component increases. However, it is quite possible that when the manager's performance-based compensation increases, his equity ownership in the firm may not simidtaneoush increase. As an example, if the performance-based compensation is in the form of stock appreciation rights, where the compensation depends on the market value of shares but is given in the form of cash, the manager's equity' ownership need not increase. A theoretical explanation for the positive reaction of the stock market to the adoption of performance-based compensation schemes, holding the equity ownership of the manager constant, however, has not been attempted so far.Item Industry homogeneity and performance impact on relative pay performance in executive compensation(2003) Licon, Lawrence Wendell; Parrino, Robert; Martin, John D.It is generally agreed that executives would do a better job managing shareholder interests if their pay was linked more directly to the performance of their firms, relative to that at peer firms. However, studies concerning the use of relative performance evaluation in executive compensation have found only weak evidence relating executive pay to peer-firm adjusted performance. This study introduces a simple model that considers executive switching and replacement cost effects on the power of the incentives that a firm can employ. The model predicts that firms with high replacement costs will find it difficult to pre-commit to a relative performance contract. The empirical results are partially consistent with the model. Firms from more homogeneous industries are more likely to pre-commit to a relative performance contract. Furthermore, the weaker (stronger) performing, more homogeneous firms, which should have lower (higher) replacement costs are more (less) likely to pre-commit. With respect to the degree of relative performance compensation paid after performance is realized, the evidence is mixed. Both industry homogeneity and performance ranking have an impact on the degree to which relative performance evaluation is found. Overall, the results suggest that the availability of an accurate signal concerning relative performance, as well as the level of a firm’s executive replacement costs, have an impact on its willingness to utilize a relative performance compensation system.