TY - JOUR
T1 - The economic psychology of incentives
T2 - an international study of top managers
AU - Pepper, Alexander
AU - Gore, Julie
PY - 2014/7
Y1 - 2014/7
N2 - 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.
AB - 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.
KW - Agency theory
KW - Behavioral economics
KW - Executive compensation
KW - Long-term incentives
KW - Motivation
UR - http://www.scopus.com/inward/record.url?scp=84898848042&partnerID=8YFLogxK
UR - http://dx.doi.org/10.1016/j.jwb.2013.07.002
U2 - 10.1016/j.jwb.2013.07.002
DO - 10.1016/j.jwb.2013.07.002
M3 - Article
AN - SCOPUS:84898848042
SN - 1090-9516
VL - 49
SP - 350
EP - 361
JO - Journal of World Business
JF - Journal of World Business
IS - 3
ER -