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.

Angiopoietin-1 and angiopoietin-2 share the same binding domains in the Tie-2 receptor involving the first Ig-like loop and the epidermal growth factor-like repeats

Angiopoietin-1 (Ang-1) and angiopoietin-2 (Ang-2) have been identified as ligands with different effector functions of the vascular assembly and maturation-mediating receptor tyrosine kinase Tie-2. To understand the molecular interactions of the angiopoietins with their receptor, we have studied the binding of Ang-1 and Ang-2 to the Tie-2 receptor. Enzyme-linked immunosorbent assay-based competition assays and co-immunoprecipitation experiments analyzing the binding of Ang-1 and Ang-2 to truncation mutants of the extracellular domain of Tie-2 showed that the first Ig-like loop of Tie-2 in combination with the epidermal growth factor (EGF)-like repeats (amino acids 1-360) is required for angiopoietin binding. The first Ig-like domain or the EGF-like repeats alone are not capable of binding Ang-1 and Ang-2. Concomitantly, we made the surprising finding that Tie-2 exon-2 knockout mice do express a mutated Tie-2 protein that lacks 104 amino acids of the first Ig-like domain. This mutant Tie-2 receptor is functionally inactive as shown by the lack of ligand binding and receptor phosphorylation. Collectively, the data show that the first 104 amino acids of the Tie-2 receptor are essential but not sufficient for angiopoietin binding. Conversely, the first 360 amino acids (Ig-like domain plus EGF-like repeats) of the Tie-2 receptor are necessary and sufficient to bind both Ang-1 and Ang-2, which suggests that differential receptor binding is not likely to be responsible for the different functions of Ang-1 and Ang-2.

The rate of outpatient cataract surgery in ten European countries: an analysis using data from the SHARE survey

BACKGROUND: The aim of this study was to determine the rates of outpatient cataract surgery (ROCS) in ten European countries and to find country-specific health indicators explaining the differences. METHODS: Using data from the Survey of Health, Ageing and Retirement in Europe (SHARE), 251 eligible respondents were identified for which cataract surgery was the last surgical procedure. The ROCS of ten countries were compared using logistic regression. The influence of the public expenditure on health as per cent of the total expenditure on health, of the number of acute care beds per 1,000 population, and of the number of practicing physicians per 1,000 population, was studied by multiple logistic regression. Additional information was obtained from country-specific opinion leaders in the field of cataract surgery. RESULTS: The ROCS differed significantly between the ten analysed European countries where Denmark had the highest (100%) and Austria the lowest (0%) rate of day care surgery. A decrease in the density of acute care beds (p < 0.0000001) and in the density of practicing physicians (p < 0.05) and an increase in the public expenditure on health as per cent of the total health expenditure (p < 0.01) lead to an increase in the ROCS. According to the opinion leaders, regulations and financial incentives also have a strong influence on the ROCS. CONCLUSIONS: The outpatient rate of cataract surgery in the ten European countries was mainly influenced by the acute-care beds density, but also by the density of practicing physicians, and by the public expenditure on health.

Waiting times for cataract surgery in ten European countries: an analysis using data from the SHARE survey

AIMS: To assess waiting times for cataract surgery and their acceptance in European countries, and to find explanatory, country-specific health indicators. METHODS: Using data from the survey of health, ageing and retirement in Europe (SHARE), waiting times for cataract surgery of 245 respondents in ten countries were analysed with the help of linear regression. The influence of four country specific health indicators on waiting times was studied by multiple linear regression. The influence of waiting time and country on the wish to have surgery performed earlier was determined through logistic regression. Additional information was obtained for each country from opinion leaders in the field of cataract surgery. RESULTS: Waiting times differed significantly (p<0.001) between the ten analysed European countries. The length of wait was significantly influenced by the total expenditure on health (p<0.01) but not by the other country specific health indicators. The wish to have surgery performed earlier was determined by the length of wait (p<0.001) but not by the country where surgery was performed. CONCLUSION: The length of wait is influenced by the total expenditure on health, but not by the rate of public expenditure on health, by the physician density or by the acute bed density. The wish to have surgery performed earlier depends on the length of wait for surgery and is not influenced by the country.