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.

Cohort-specific effects of the expansion of the welfare state on job opportunities: a longitudinal analysis of three birth cohorts in the Federal Republic of Germany

Ziel der Untersuchung war es, Einflüsse auf den Arbeitsmarkt der Bundesrepublik durch das Anwachsen des Wohlfahrtsstaates zu ermitteln. Zu diesem Zweck wurden zwischen 1981 und 1983 2.171 Männer und Frauen der Geburtskohorten 1929-31, 1939-41 und 1949-51 mit standardisierten Interviews befragt zu ihrem Lebensverlauf, speziell unter den Gesichtspunkten: Soziale Herkunft, Ausbildung, Beschäftigung, Familie, Mobilität. Insbesondere interessierte die Frage nach der Beschäftigung im öffentlichen Dienst oder in der Privatwirtschaft bzw. ob und wann ein Wechsel von einem in den anderen Bereich stattgefunden hat. Einige Ergebnisse: Die Bildungsexpansion in den 70er Jahren führte dazu, daß eine steigende Anzahl von Universitätsabsolventen im öffentlichen Dienst Beschäftigung fand; seit der Stagnation des Wohlfahrtsstaates ab ca. 1980 sind die Beschäftigungschancen für hochqualifizierte Berufsanfänger dort wieder gesunken. In der Privatwirtschaft wird unqualifizierte Beschäftigung durch höher qualifizierte ersetzt, während im öffentlichen Dienst bei geringerem Arbeitsplatzangebot weniger hochqualifizierte Berufsanfänger nachgefragt werden.

Über die Bedeutsamkeit linguistischen Wissens im privatwirtschaftlichen Arbeitsfeld

Until today, linguistics as an academic field does not aim at responding to the expectations of the job market. However, on the backdrop of an increasing interrelation of politics, economy and science, questions as to the applicability of linguistics to labour processes and the employability of linguists are raised and need to be answered. In analysing data gained in the course of 21 interviews conducted with linguists working in the private sector of economy, several issues have shown to be of major interest. This paper addresses firstly in what ways linguistics was likely to be seen as relevant for the jobs held by the various interviewees from the point of view of their employers, which is then compared to the interviewees' own evaluations on the relevance of linguistic knowledge for their daily work. On the one hand it becomes clear that there are differences between the three comparable situations in which the analysed transfer of knowledge takes place (Quereinstieg, Schnittstellenjob, "sprachperformativer Job"). One the other hand linguistic expertise in the extra-academic field seems to be most salient or approved of when it comes to language competence in text production or communicative situations, which further complicates the attempt to make linguistics transparent for non-linguists.