Essays on behavioral aspects of the design and disclosure of compensation contracts

This thesis consists of four essays on the design and disclosure of compensation contracts. Essays 1, 2 and 3 focus on behavioral aspects of mandatory compensation disclosure rules and of contract negotiations in agency relationships. The three experimental studies develop psychology- based theory and present results that deviate from standard economic predictions. Furthermore, the results of Essay 1 and 2 also have implications for firms’ discretion in how to communicate their top management’s incentives to the capital market. Essay 4 analyzes the role of fairness perceptions for the evaluation of executive compensation. For this purpose, two surveys targeting representative eligible voters as well as investment professionals were conducted. Essay 1 investigates the role of the detailed ‘Compensation Discussion and Analysis’, which is part of the Security and Exchange Commission’s 2006 regulation, on investors’ evaluations of executive performance. Compensation disclosure complying with this regulation clarifies the relationship between realized reported compensation and the underlying performance measures and their target achievement levels. The experimental findings suggest that the salient presentation of executives’ incentives inherent in the ‘Compensation Discussion and Analysis’ makes investors’ performance evaluations less outcome dependent. Therefore, investors’ judgment and investment decisions might be less affected by noisy environmental factors that drive financial performance. The results also suggest that fairness perceptions of compensation contracts are essential for investors’ performance evaluations in that more transparent disclosure increases the perceived fairness of compensation and the performance evaluation of managers who are not responsible for a bad financial performance. These results have important practical implications as firms might choose to communicate their top management’s incentive compensation more transparently in order to benefit from less volatile expectations about their future performance. Similar to the first experiment, the experiment described in Essay 2 addresses the question of more transparent compensation disclosure. However, other than the first experiment, the second experiment does not analyze the effect of a more salient presentation of contract information but the informational effect of contract information itself. For this purpose, the experiment tests two conditions in which the assessment of the compensation contracts’ incentive compatibility, which determines executive effort, is either possible or not. On the one hand, the results suggest that the quality of investors’ expectations about executive effort is improved, but on the other hand investors might over-adjust their prior expectations about executive effort if being confronted with an unexpected financial performance and under-adjust if the financial performance confirms their prior expectations. Therefore, in the experiment, more transparent compensation disclosure does not lead to more correct overall judgments of executive effort and to even lower processing quality of outcome information. These results add to the literature on disclosure which predominantly advocates more transparency. The findings of the experiment however, identify decreased information processing quality as a relevant disclosure cost category. Firms might therefore carefully evaluate the additional costs and benefits of more transparent compensation disclosure. Together with the results from the experiment in Essay 1, the two experiments on compensation disclosure imply that firms should rather focus on their discretion how to present their compensation disclosure to benefit from investors’ improved fairness perceptions and their spill-over on performance evaluation. Essay 3 studies the behavioral effects of contextual factors in recruitment processes that do not affect the employer’s or the applicant’s bargaining power from a standard economic perspective. In particular, the experiment studies two common characteristics of recruitment processes: Pre-contractual competition among job applicants and job applicants’ non-binding effort announcements as they might be made during job interviews. Despite the standard economic irrelevance of these factors, the experiment develops theory regarding the behavioral effects on employees’ subsequent effort provision and the employers’ contract design choices. The experimental findings largely support the predictions. More specifically, the results suggest that firms can benefit from increased effort and, therefore, may generate higher profits. Further, firms may seize a larger share of the employment relationship’s profit by highlighting the competitive aspects of the recruitment process and by requiring applicants to make announcements about their future effort. Finally, Essay 4 studies the role of fairness perceptions for the public evaluation of executive compensation. Although economic criteria for the design of incentive compensation generally do not make restrictive recommendations with regard to the amount of compensation, fairness perceptions might be relevant from the perspective of firms and standard setters. This is because behavioral theory has identified fairness as an important determinant of individuals’ judgment and decisions. However, although fairness concerns about executive compensation are often stated in the popular media and even in the literature, evidence on the meaning of fairness in the context of executive compensation is scarce and ambiguous. In order to inform practitioners and standard setters whether fairness concerns are exclusive to non-professionals or relevant for investment professionals as well, the two surveys presented in Essay 4 aim to find commonalities in the opinions of representative eligible voters and investments professionals. The results suggest that fairness is an important criterion for both groups. Especially, exposure to risk in the form of the variable compensation share is an important criterion shared by both groups. The higher the assumed variable share, the higher is the compensation amount to be perceived as fair. However, to a large extent, opinions on executive compensation depend on personality characteristics, and to some extent, investment professionals’ perceptions deviate systematically from those of non-professionals. The findings imply that firms might benefit from emphasizing the riskiness of their managers’ variable pay components and, therefore, the findings are also in line with those of Essay 1.

The World of Indicators. The Making of Governmental Knowledge through Quantification

The twenty-first century has seen a further dramatic increase in the use of quantitative knowledge for governing social life after its explosion in the 1980s. Indicators and rankings play an increasing role in the way governmental and non-governmental organizations distribute attention, make decisions, and allocate scarce resources. Quantitative knowledge promises to be more objective and straightforward as well as more transparent and open for public debate than qualitative knowledge, thus producing more democratic decision-making. However, we know little about the social processes through which this knowledge is constituted nor its effects. Understanding how such numeric knowledge is produced and used is increasingly important as proliferating technologies of quantification alter modes of knowing in subtle and often unrecognized ways. This book explores the implications of the global multiplication of indicators as a specific technology of numeric knowledge production used in governance. Combination of insights from anthropology of law, history of science, science and technology studies, sociology of quantification, economics and geography will appeal to those who are uncomfortable with the separation between 'theoretical' and 'empirical' approaches and with the current weakness of critique that address the main trends shaping the relations between capitalism, markets, law and democracy Theoretical discussion of the nature and historical formation of quantification will appeal to those who ask questions such as, 'What is new or different about our contemporary reliance on quantitative knowledge?' Groundbreaking empirical case studies uncover the social work and politics that often go into the making of indicators and explore the far-reaching effects and impacts of these numerical representations in specific settings

Life-span development of self-esteem and its effects on important life outcomes

We examined the life-span development of self-esteem and tested whether self-esteem influences the development of important life outcomes, including relationship satisfaction, job satisfaction, occupational status, salary, positive and negative affect, depression, and physical health. Data came from the Longitudinal Study of Generations. Analyses were based on 5 assessments across a 12-year period of a sample of 1,824 individuals ages 16 to 97 years. First, growth curve analyses indicated that self-esteem increases from adolescence to middle adulthood, reaches a peak at about age 50 years, and then decreases in old age. Second, cross-lagged regression analyses indicated that self-esteem is best modeled as a cause rather than a consequence of life outcomes. Third, growth curve analyses, with self-esteem as a time-varying covariate, suggested that self-esteem has medium-sized effects on life-span trajectories of affect and depression, small to medium-sized effects on trajectories of relationship and job satisfaction, a very small effect on the trajectory of health, and no effect on the trajectory of occupational status. These findings replicated across 4 generations of participants— children, parents, grandparents, and their great-grandparents. Together, the results suggest that self-esteem has a significant prospective impact on real-world life experiences and that high and low self-esteem are not mere epiphenomena of success and failure in important life domains.

Effects of team Knowledge and ecological constraints on decisional processes in customized football game scenarios

Several theories assume that successful team coordination is partly based on knowledge that helps anticipating individual contributions necessary in a situational task. It has been argued that a more ecological perspective needs to be considered in contexts evolving dynamically and unpredictably. In football, defensive plays are usually coordinated according to strategic concepts spanning all members and large areas of the playfield. On the other hand, fewer people are involved in offensive plays as these are less projectable and strongly constrained by ecological characteristics. The aim of this study is to test the effects of ecological constraints and player knowledge on decision making in offensive game scenarios. It is hypothesized that both knowledge about team members and situational constraints will influence decisional processes. Effects of situational constraints are expected to be of higher magnitude. Two teams playing in the fourth league of the Swiss Football Federation participate in the study. Forty customized game scenarios were developed based on the coaches’ information about player positions and game strategies. Each player was shown in ball possession four times. Participants were asked to take the perspective of the player on the ball and to choose a passing destination and a recipient. Participants then rated domain specific strengths (e.g., technical skills, game intelligence) of each of their teammates. Multilevel models for categorical dependent variables (team members) will be specified. Player knowledge (rated skills) and ecological constraints (operationalized as each players’ proximity and availability for ball reception) are included as predictor variables. Data are currently being collected. Results will yield effects of parameters that are stable across situations as well as of variable parameters that are bound to situational context. These will enable insight into the degree to which ecological constraints and more enduring team knowledge are involved in decisional processes aimed at coordinating interpersonal action.