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.

A conceptual model of compensation/decompensation in lumbar segmental instability

Lumbar spinal instability (LSI) is a common spinal disorder and can be associated with substantial disability. The concept of defining clinically relevant classifications of disease or 'target condition' is used in diagnostic research. Applying this concept to LSI we hypothesize that a set of clinical and radiological criteria can be developed to identify patients with this target condition who are at high risk of 'irreversible' decompensated LSI for whom surgery becomes the treatment of choice. In LSI, structural deterioration of the lumbar disc initiates a degenerative cascade of segmental instability. Over time, radiographic signs become visible: traction spurs, facet joint degeneration, misalignment, stenosis, olisthesis and de novo scoliosis. Ligaments, joint capsules, local and distant musculature are the functional elements of the lumbar motion segment. Influenced by non-functional factors, these functional elements allow a compensation of degeneration of the motion segment. Compensation may happen on each step of the degenerative cascade but cannot reverse it. However, compensation of LSI may lead to an alleviation or resolution of clinical symptoms. In return, the target condition of decompensation of LSI may cause the new occurrence of symptoms and pain. Functional compensation and decompensation are subject to numerous factors that can change which makes estimation of an individual's long-term prognosis difficult. Compensation and decompensation may influence radiographic signs of degeneration, e.g. the degree of misalignment and segmental angulation caused by LSI is influenced by the tonus of the local musculature. This conceptual model of compensation/decompensation may help solve the debate on functional and psychosocial factors that influence low back pain and to establish a new definition of non-specific low back pain. Individual differences of identical structural disorders could be explained by compensated or decompensated LSI leading to changes in clinical symptoms and pain. Future spine surgery will have to carefully define and measure functional aspects of LSI, e.g. to identify a point of no return where multidisciplinary interventions do not allow a re-compensation and surgery becomes the treatment of choice.

Horn Growth and Reproduction in a Long-Lived Male Mammal: No Compensation for Poor Early-Life Horn Growth

Secondary sexual traits in males of polygynous species are important determinants of reproductive success. It is, however, unknown if and how the development of continuously growing traits at different life-stages is related to reproduction in long-lived male mammals. In this study, we evaluated the relationship of early and late horn growth on social status and reproduction in long-lived male Alpine ibex (Capra ibex). For this, we analysed individual horn growth and assessed its effect on dominance and reproduction. No evidence was detected for compensatory horn growth, as late-life horn growth positively depended on early-life horn growth in males. Still, individuals with longer horn segments grown during early adulthood experienced a stronger age-dependent length decline in annual horn growth during the late development. Accordingly, a divergence between individual growth potential and realized horn growth late in life has to be assumed. Residual age-specific horn length and length of early grown horn segments both positively affected dominance and reproductive success, whereas, contrary to our expectation, no significant effect of the length of horn segments grown during the late development was detected. Suspected higher somatic costs incurred by high-quality males during their late development might at least partly be responsible for this finding. Overall, our study suggests that the total length of horns and their early development in long-lived male Alpine ibex is a reliable indicator of reproductive success and that individuals may be unable to compensate for poor early-life growth performance at a later point in life.

Rivalry of homeostatic and sensory-evoked emotions: dehydration attenuates olfactory disgust and its neural correlates

Neural correlates have been described for emotions evoked by states of homeostatic imbalance (e.g. thirst, hunger, and breathlessness) and for emotions induced by external sensory stimulation (such as fear and disgust). However, the neurobiological mechanisms of their interaction, when they are experienced simultaneously, are still unknown. We investigated the interaction on the neurobiological and the perceptional level using subjective ratings, serum parameters, and functional magnetic resonance imaging (fMRI) in a situation of emotional rivalry, when both a homeostatic and a sensory-evoked emotion were experienced at the same time. Twenty highly dehydrated male subjects rated a disgusting odor as significantly less repulsive when they were thirsty. On the neurobiological level, we found that this reduction in subjective disgust during thirst was accompanied by a significantly reduced neural activity in the insular cortex, a brain area known to be considerably involved in processing of disgust. Furthermore, during the experience of disgust in the satiated condition, we observed a significant functional connectivity between brain areas responding to the disgusting odor, which was absent during the stimulation in the thirsty condition. These results suggest interference of conflicting emotions: An acute homeostatic imbalance can attenuate the experience of another emotion evoked by the sensory perception of a potentially harmful external agent. This finding offers novel insights with regard to the behavioral relevance of biologically different types of emotions, indicating that some types of emotions are more imperative for behavior than others. As a general principle, this modulatory effect during the conflict of homeostatic and sensory-evoked emotions may function to safeguard survival.

Differential spatial and structural organization of the X chromosome underlies dosage compensation in C. elegans.

The adjustment of X-linked gene expression to the X chromosome copy number (dosage compensation [DC]) has been widely studied as a model of chromosome-wide gene regulation. In Caenorhabditis elegans, DC is achieved by twofold down-regulation of gene expression from both Xs in hermaphrodites. We show that in males, the single X chromosome interacts with nuclear pore proteins, while in hermaphrodites, the DC complex (DCC) impairs this interaction and alters X localization. Our results put forward a structural model of DC in which X-specific sequences locate the X chromosome in transcriptionally active domains in males, while the DCC prevents this in hermaphrodites.

Reliability of Quantitative Sensory Tests in a Low Back Pain Population.

BACKGROUND AND OBJECTIVES Reliability is an essential condition for using quantitative sensory tests (QSTs) in research and clinical practice, but information on reliability in patients with chronic pain is sparse. The aim of this study was to evaluate the reliability of different QST in patients with chronic low back pain. METHODS Eighty-nine patients with chronic low back pain participated in 2 identical experimental sessions, separated by at least 7 days. The following parameters were recorded: pressure pain detection and tolerance thresholds at the toe, electrical pain thresholds to single and repeated stimulation, heat pain detection and tolerance thresholds at the arm and leg, cold pain detection threshold at the arm and leg, and conditioned pain modulation using the cold pressor test.Reliability was analyzed using the coefficient of variation, the coefficient of repeatability, and the intraclass correlation coefficient. It was judged as acceptable or not based primarily on the analysis of the coefficient of repeatability. RESULTS The reliability of most tests was acceptable. Exceptions were cold pain detection thresholds at the leg and arm. CONCLUSIONS Most QST measurements have acceptable reliability in patients with chronic low back pain.

Exploring the emotional brain: Neural correlates of homeostatic and sensory-evoked emotions and their interaction in emotional rivalry

Human emotions are essential for survival. They are vital for the satisfaction of basic needs, the regulation of personal life and successful integration into social structures. Depending on which aspect of an emotion is used in its definition, many different theories offer possible answers to the questions of what emotions are and how they can be distinguished. The systematic investigation of emotions in cognitive neuroscience is relatively new, and neuroimaging studies specifically focussing on the neural correlates of different categories of emotions are still lacking. Therefore, the current thesis aimed at investigating the behavioural and neurophysiological correlates of different human emotional levels and their interaction in healthy subjects. We differentiated between emotions according to their cerebral entry site and neural processing pathways: homeostatic emotions, which are elicited by metabolic changes and processed by the interoceptive system (such as thirst, hunger, and need for air), and sensory-evoked emotions, which are evoked by external inputs via the eyes, ears or nose, or their corresponding mental representations and processed in the brain as sensory perception (e.g. fear, disgust, or pride). Using functional magnetic resonance imaging (fMRI) and behavioural parameters, we examined both the specific neural underpinnings of a homeostatic emotion (thirst) and a sensory-evoked emotion (disgust), and their interaction in a situation of emotional rivalry when both emotions were perceived simultaneously. This thesis comprises three research articles reporting the results of this research. The first paper presents disgust-related brain imaging data in a thirsty and a satiated condition. We found that disgust mainly activated the anterior insular cortex. In the thirsty condition, however, we observed an interaction effect between disgust and thirst: when thirsty, the subjects rated the disgusting stimulus as less repulsive. On the neurobiological level, this reduction of subjective disgust was accompanied by significantly reduced neural activity in the insular cortex. These results provide new neurophysiological evidence for a hierarchical organization among homeostatic and sensory-evoked emotions, revealing that in a situation of emotional conflict, homeostatic emotions are prioritized over sensory-evoked emotions. In the second paper, findings on brain perfusion over four different thirst stages are reported, with a special focus on the parametric progression of thirst. Cerebral perfusion differences over all thirst stages were found in the posterior insular cortex. Taking this result together with the findings of the first paper, the insular cortex seems to be a key player in human emotional processing, since it comprises specific representations of homeostatic and sensory-evoked emotions and also represents the site of cortical interaction between the two levels of emotions. Finally, although this thesis focussed on the homeostatic modulation of disgust, we were also interested in whether dehydration modulates taste perception. The results of this behavioural experiment are described in the third paper, where we show that dehydration alters the perception of neutral taste stimuli.

The use of an electronic von Frey device for evaluation of sensory threshold in neurologically normal dogs and those with acute spinal cord injury

The utility and inter-session repeatability of sensory threshold measurements using an electronic von Frey anesthesiometer (VFA) were assessed in a group of six neurologically normal dogs. Sensory threshold values obtained in neurologically normal dogs were compared to those of dogs with acute spinal cord injury (SCI) caused by intervertebral disc extrusion (n=6) and to a group of neurologically normal dogs with cranial cruciate ligament rupture (CCLR; n=6). Sensory threshold values in neurologically normal dogs were 155.8 ± 37.7 g and 154.7 ± 67.2 g for the left and right pelvic limbs, respectively. The difference in mean sensory threshold values obtained for the group when two distinct testing sessions were compared was not statistically significant (P>0.05). Mean sensory threshold values for the group with SCI were significantly higher than those for neurologically normal dogs at 351.1 ± 116.5 g and 420.3 ± 157.7 g for the left and right pelvic limbs, respectively (P=0.01). A comparison of sensory threshold values for the group with CCLR and neurologically normal dogs was not statistically significant (P>0.05). The modified dorsal technique for VFA described here represents a reliable method to assess sensory threshold in neurologically normal dogs and in those with SCI.

The role of sensory neuron outgrowth in long-term sensitization of the tail-elicited tail-siphon withdrawal reflex of Aplysia

Neuronal outgrowth has been proposed in many systems as a mechanism underlying memory storage. For example, sensory neuron outgrowth is widely accepted as an underlying mechanism of long-term sensitization of defensive withdrawal reflexes in Aplysia. The hypothesis is that learning leads to outgrowth and consequently to the formation of new synapses, which in turn strengthen the neural circuit underlying the behavior. However, key experiments to test this hypothesis have never been performed. ^ Four days of sensitization training leads to outgrowth of siphon sensory neurons mediating the siphon-gill withdrawal response in Aplysia . We found that a similar training protocol produced robust outgrowth in tail sensory neurons mediating the tail siphon withdrawal reflex. In contrast, 1 day of training, which effectively induces long-term behavioral sensitization and synaptic facilitation, was not associated with neuronal outgrowth. Further examination of the effect of behavioral training protocols on sensory neuron outgrowth indicated that this structural modification is associated only with the most persistent forms of sensitization, and that the induction of these changes is dependent on the spacing of the training trials over multiple days. Therefore, we suggest that neuronal outgrowth is not a universal mechanism underlying long-term sensitization, but is involved only in the most persistent forms of the memory. ^ Sensory neuron outgrowth presumably contributes to long-term sensitization through formation of new synapses with follower motor neurons, but this hypothesis has never been directly tested. The contribution of outgrowth to long-term sensitization was assessed using confocal microscopy to examine sites of contact between physiologically connected pairs of sensory and motor neurons. Following 4 days of training, the strength of both the behavior and sensorimotor synapse and the number of appositions with follower neurons was enhanced only on the trained side of the animal. In contrast, outgrowth was induced on both sides of the animal, indicating that although sensory neuron outgrowth does appear to contribute to sensitization through the formation of new synapses, outgrowth alone is not sufficient to account for the effects of sensitization. This indicates that key regulatory steps are downstream from outgrowth, possibly in the targeting of new processes and activation of new synapses. ^

Potential Role of Adenosine Signaling in Acetic Acid Activation of Murine Sensory Neurons

Chronic respiratory illnesses are a significant cause of morbidity and mortality, and acute changes in respiratory function often lead to hospitalization. Air pollution is known to exacerbate asthma, but the molecular mechanisms of this are poorly understood. The current studies were aimed at clarifying the roles of nerve subtypes and purinergic receptors in respiratory reflex responses following exposure to irritants. In C57Bl/6J female mice, inspired adenosine produced sensory irritation, shown to be mediated mostly by A-delta fibers. Secondly, the response to inhaled acetic acid was discovered to be dually influenced by C and A-delta fibers, as indicated by the observed effects of capsaicin pretreatment, which selectively destroys TRPV1-expressing fibers (mostly C fibers) and pretreatment with theophylline, a nonselective adenosine receptor antagonist. The responses to both adenosine and acetic acid were enhanced in the ovalbumin-allergic airway disease model, although the particular pathway altered is still unknown.

Private Property, Public Use, and Just Compensation: The Economics of Eminent Domain

The eminent domain clause of the U.S. Constitution concerns the limits of the government's right to take private property for public use. The economic literature on this issue has examined (1) the proper scope of this power as embodied by the 'public use' requirement, (2) the appropriate definition, and implications, of 'just compensation,' and (3) the impact of eminent domain on land use incentives of owners whose land is subject to a taking risk. This essay reviews this literature and draws implications for our understanding of eminent domain law.

Signal relay between two integral membrane proteins: The sensory rhodopsin I/HtrI transducer molecular complex

The molecular complex of sensory rhodopsin I (SRI) and its transducer HtrI mediate color-sensitive phototaxis in the archaeon Halobacterium salinarum. Orange light causes an attractant response by a one-photon reaction and white light causes a repellent response by a two-photon reaction. Three aspects of this molecular complex were explored: (i) We determined the stoichiometry of SRI and HtrI to be 2:2 by gene fusion analysis. A SRI-HtrI fusion protein was expressed in H. salinarum and shown to mediate 1-photon and 2-photon phototaxis responses comparable to wild-type complex. Disulfide crosslinking demonstrated that the fusion protein is a homodimer in the membrane. Measurement of photochemical reaction kinetics and pH titration of absorption spectra established that both SRI domains are complexed to HtrI in the fusion protein, and therefore the stoichiometry is 2:2. (ii) Cytoplasmic channel closure of SRI by HtrI, an important aspect of their interaction, was investigated by incremental HtrI truncation. We found that binding of the membrane-embedded portion of HtrI is insufficient for channel closure, whereas cytoplasmic extension of the second HtrI transmembrane helix by 13 residues blocks proton conduction through the channel as well as full-length HtrI. The closure activity is localized to 5 specific residues, each of which incrementally contributes to reduction of proton conductivity. Moreover, these same residues in the dark incrementally and proportionally increase the pKa of the Asp76 counterion to the protonated Schiff base chromophore. We conclude that this critical region of HtrI alters the dark conformation of SRI as well as light-induced channel opening. (iii) We developed a procedure for reconstituting HtrI-free SRI and the SRI/HtrI complex into liposomes, which exhibit photocycles with opened and closed cytoplasmic channels, respectively, as in the membrane. This opens the way for study of the light-induced conformational change and the interaction in vitro by fluorescence and spin-labeling. Single-cysteine mutations were introduced into helix F of SRI, labeled with a nitroxide spin probe and a fluorescence probe, reconstituted into proteoliposomes, and light-induced conformational changes detected in the complex. The probe signals can now be used as the readout of signaling to analyze mutants and the kinetics of signal relay. ^

Long-term hyperexcitability of sensory and motor axons in Aplysia californica: Induction by axotomy, serotonin, and transient depolarization

Neuropathic pain is a debilitating neurological disorder that may appear after peripheral nerve trauma and is characterized by persistent, intractable pain. The well-studied phenomenon of long-term hyperexcitability (LTH), in which sensory somata become hyperexcitable following peripheral nerve injury may be important for both chronic pain and long-lasting memory formation, since similar cellular alterations take place after both injury and learning. Though axons have previously been considered simple conducting cables, spontaneous afferent signals develop from some neuromas that form at severed nerve tips, indicating intrinsic changes in sensory axonal excitability may contribute to this intractable pain. Here we show that nerve transection, exposure to serotonin, and transient depolarization induce long-lasting sensory axonal hyperexcitability that is localized to the treated nerve segment and requires local translation of new proteins. Long-lasting functional plasticity may be a general property of axons, since both injured and transiently depolarized motor axons display LTH as well. Axonal hyperexcitability may represent an adaptive mechanism to overcome conduction failure after peripheral injury, but also displays key features shared with cellular analogues of memory including: site-specific changes in neuronal function, dependence on transient, focal depolarization for induction, and requirement for synthesis of new proteins for expression of long-lasting effects. The finding of axonal hyperexcitability after nerve injury sheds new light on the clinical problem of chronic neuropathic pain, and provides more support for the hypothesis that mechanisms of long-term memory storage evolved from primitive adaptive responses to injury. ^