Risk taking of executives under different incentive contracts: experimental evidence

Classic financial agency theory recommends compensation through stock options rather than shares to counteract excessive risk aversion in agents. In a setting where any kind of risk taking is suboptimal for shareholders, we show that excessive risk taking may occur for one of two reasons: risk preferences or incentives. Even when compensated through restricted company stock, experimental CEOs take large amounts of excessive risk. This contradicts classical financial theory, but can be explained through risk preferences that are not uniform over the probability and outcome spaces, and in particular, risk seeking for small probability gains and large probability losses. Compensation through options further increases risk taking as expected. We show that this effect is driven mainly by the personal asset position of the experimental CEO, thus having deleterious effects on company performance.

Financial distress as a collapse of incentive scheme

This paper explaina why workers lack motivation near bankruptcy, why they tend to leave companies in financiai distreas, and why thoae who remam require higher compensation. Theae indirect costa of financiai diatresa adie becauae the optimal combination of debt and incentive achem.ea, deaigned to minimize agency costa, ends up underpaying managers when there ia a bankruptcy threat. The paper a1so providea new empirica1 implications on the intera.ction between financiai reatructuring and changea in managerial compensation. Theae predictions are supported by the findings of Gilson and Vetsuypens (1992).

Workplace diversity and incentive contracts : theory and evidence

This paper presents a simple theory of the provision of incentives in firms in which the principal optimally chooses both compensation contracts and the composition of the work force. Assuming that individuals display group loyalty, a less diverse (more homogeneous) work force will be more cooperative. Simple comparative statics provide some testable implications relating risk, diversity and incentive pay. I also analyze the case in which workers’ characteristics cannot be readily observed ex ante. The theory then predicts that firms are more likely to prevent workers from interacting with each other when workers are expected to have similar characteristics. This shows a surprising effect of diversity in the workplace: more diverse firms will promote more interactions between workers of different types, i.e. they will be less segregated. I test the main predictions of the model using a cross-sectional sample of corporate boards. I use the proportion of women on boards as a measure of diversity. There are three main empirical findings: (1) a significant negative correlation between firm risk and diversity, (2) a significant positive relationship between performance-based compensation and diversity and (3) a significant positive correlation between the number of board meetings (a measure of interactions among directors) and diversity. The evidence is broadly consistent with the implications of the theory.

CEO compensation, option incentives and information disclosure

This paper examines the impact of information disclosure on the valuation of CEO options and the incentives created by those options. Prior executive compensation research in the US has made assumptions about key input variables that can affect the calculation of option values and financial incentives. Accordingly, biases may have ensued due to incomplete information disclosure about noncurrent option grants. Using new data on a sample of UK CEOs, we value executive option holdings and incentives for the first time and estimate the levels of distortion created by the less than complete US-style disclosure requirements. We also investigate the levels of distortion in the UK for the minority of companies that choose to reveal only partial information. Our results suggest that there have to date been few economic biases arising from less than complete information disclosure. Furthermore, we demonstrate that researchers using US data, who made reasonable assumptions about the inputs of noncurrent option grants, are unlikely to have made significant errors when calculating CEO financial incentives or option wealth. However, the recent downturn in the US stock market could result in the same assumptions, producing exaggerated incentive estimates in the future.

An Empirical Analysis of Continuing Improvements Following the Implementation of a Performance-Based Compensation Plan

Performance improvements subsequent to the implementation of a pay-for-performance plan can result because more productive employees self-select into the firm (selection effect) and/or because employees allocate effort to become more effective (effort effect). We analyze individual performance data for 3,776 sales employees of a retail firm to evaluate these alternative sources of continuing performance improvement. The incentive plan helps the firm attract and retain more productive sales employees, and motivates these employees to further improve their productivity. In contrast, the less productive sales employees’ performance declines before they leave the firm.

Evaluating Form and Functionality of Pay-For-Performance Plans: The Relative Incentive and Sorting Effects of Merit Pay, Bonuses, and Long-Term Incentives

Using two-year longitudinal data from a large sample of US employees from a service-related organization, the present study investigates the relative effects of three forms of pay-for-performance plans on employees’ job performance (incentive effects) and voluntary turnover (sorting effects). The study differentiates between three forms of pay: merit pay, individual-based bonuses, and long-term incentives. By definition, these PFP plans have different structural elements that distinguish them from each other (i.e., pay plan form) and different characteristics (functionality), such as the degree to which pay and performance are linked and the size of the rewards, which can vary both within and across plan types. Our results provide evidence that merit raises have larger incentive and sorting effects than bonuses and long-term incentives in multi-PFP plan environments where the three PFP plans are operating simultaneously. Only merit pay has both incentive and sorting effects among the three PFP plans. The implications for the PFP-related theory, as well as for the design and implementation of PFP plans, are discussed.

Clipping noise compensation for OFDMA systems

This paper presents an efficient low-complexity clipping noise compensation scheme for PAR reduced orthogonal frequency division multiple access (OFDMA) systems. Conventional clipping noise compensation schemes proposed for OFDM systems are decision directed schemes which use demodulated data symbols. Thus these schemes fail to deliver expected performance in OFDMA systems where multiple users share a single OFDM symbol and a specific user may only know his/her own modulation scheme. The proposed clipping noise estimation and compensation scheme does not require the knowledge of the demodulated symbols of the other users, making it very promising for OFDMA systems. It uses the equalized output and the reserved tones to reconstruct the signal by compensating the clipping noise. Simulation results show that the proposed scheme can significantly improve the system performance.

Estimation and compensation of clipping noise in OFDMA systems

We propose an efficient and low-complexity scheme for estimating and compensating clipping noise in OFDMA systems. Conventional clipping noise estimation schemes, which need all demodulated data symbols, may become infeasible in OFDMA systems where a specific user may only know his own modulation scheme. The proposed scheme first uses equalized output to identify a limited number of candidate clips, and then exploits the information on known subcarriers to reconstruct clipped signal. Simulation results show that the proposed scheme can significantly improve the system performance.

No energy compensation at the meal following exercise indietary restrained and unrestrained women

The objective of this investigation was to compare the acute effects of exercise and diet manipulations on energy intake, between dietary restrained and unrestrained females. Comparisons of two studies using an identical 2 x 2 repeated-measures design (level of activity (rest or exercise) and lunch type (high-fat or low-fat)) including thirteen dietary unrestrained and twelve restrained females were performed. Energy expenditure during the rest session was estimated and the energy cost of exercise was measured by indirect calorimetry. Relative energy intake was calculated by subtracting the energy expenditure of the exercise session from the energy intake of the test meal. Post-meal hedonic ratings were completed after lunch. Energy intake and relative energy intake increased during high-fat conditions compared with the low-fat, independently of exercise (P < 0.001). There was a positive relationship between dietary restraint scores and energy intake or relative energy intake in the rest conditions only (r 0.54, P < 0.01). The decrease of relative energy intake between the rest and exercise conditions was higher in restrained than in unrestrained eaters (P < 0.01). These results confirm that a high-fat diet reversed the energy deficit due to exercise. There was no energy compensation in response to an acute bout of exercise during the following meal. In restrained eaters, exercise was more effective in creating an energy deficit than in unrestrained eaters. Exercise may help restrained eaters to maintain control over appetite.