The economic psychology of incentives

an international study of top managers

Alexander Pepper, Julie Gore

Research output: Contribution to journalArticle

18 Citations (Scopus)

Abstract

The world-wide inflation in executive compensation in recent years has been accompanied by an increase in the prevalence of long-term incentives. This article demonstrates how the subjectively perceived value of long-term incentives is affected by risk aversion, uncertainty aversion, and time preferences. Based on a unique empirical study which involved collecting primary data on executive preferences from around the world, and using a theoretical framework which draws on behavioral agency theory, we conclude that, while long-term incentives are perceived by executives to be effective, they are not in fact an efficient form of reward, and that this outcome is not significantly affected by cross-cultural differences. We conjecture that boards of directors, acting on behalf of shareholders, increase the size of long-term incentive awards in order to compensate executives for the perceived loss of value when compared with less risky, more certain and more immediate forms of reward.

Original languageEnglish
Pages (from-to)350-361
Number of pages12
JournalJournal of World Business
Volume49
Issue number3
DOIs
Publication statusPublished - Jul 2014

Fingerprint

Managers
Economic psychology
International studies
Incentives
Reward
Uncertainty aversion
Inflation
Empirical study
Time preference
Shareholders
Theoretical framework
Risk aversion
Board of directors
Cross-cultural differences
Perceived value
Agency theory
Executive compensation

Keywords

  • Agency theory
  • Behavioral economics
  • Executive compensation
  • Long-term incentives
  • Motivation

Cite this

The economic psychology of incentives : an international study of top managers. / Pepper, Alexander; Gore, Julie.

In: Journal of World Business, Vol. 49, No. 3, 07.2014, p. 350-361.

Research output: Contribution to journalArticle

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