Subjective and objective performance evaluation

We study executive compensation in an environment in which firms compete offering contingent contracts to managers with private information about their ability. We ask whether equilibrium executive compensation depends on subjective evaluations, i.e., on assessments made by the firm which are based on noncontractible information. We also allow for objective (i.e., contractible) performance measures and we depart from the rest of the literature on the topic by assuming that subjective evaluations are made before the uncertainty on the objective performance measures is resolved. We find that even in this case, equilibrium contracts ignore subjective evaluations regardless of their informativeness

What form of relative performance evaluation?

We study relative performance evaluation in executive compensation when executives have private information about their ability. We assume that the joint distribution of an individual firm’s profit and market movements depends on the ability of the executive that runs the firm. In the equilibrium of the executive labor market, compensation schemes exploit this fact to sort executives of di ?erent abilities. This implies that executive compensation is increasing in own performance, but may also be increasing in industry performance-a sharp departure from standard relative performance evaluation. This result provides an explanation for the scarcity of relative performance considerations in executive compensation documented by the empirical literature.Executive compensation, relative performance evaluation

Executive pay with observable decisions

We propose a model of delegated expertise designed to analyze executive compensation. An expert has to pick one of two possible decisions. By exerting effort the expert can obtain private information on these decisions. The expert’s decision and its ultimate performance realization are publicly observed, but the expert’s information is not. In other words, the principal observes the expert’s decision and its realization, but does not know whether the expert expended effort to obtain information and whether he made an efficient decision conditional on the information he received. We characterize the optimal compensation contract among those that give the expert incentives to obtain information to determine the efficient decision and to make the decision that is efficient contingent on the obtained information. We show that: 1) It is generically optimal to make pay contingent on the decision made by the expert, not only on performance; 2) The expert is often rewarded for choosing alternatives that are ex-ante inefficient. 3) When decisions differ in their complexity, optimal pay-performance may be zero if the expert chooses the complex alternative. Our model highlights novel factors that should be considered in the design of executive compensation contracts, sheds light on existing compensation practices, such as rewarding executives for acquisitions, and suggests mechanisms to promote managerial innovation.We gratefully acknowledge the financial support of FEDEA and the Spanish Ministry of Innovation and Science for financial support under grant SEJ2008-03516. Rosa Loveira gratefully acknowledges the financial support of Xunta de Galicia (Spain) under the Isidro Parga Pondal research grant. We thank seminar participants at Universidad Carlos III, Universidade de Vigo, Econometric Society European Meeting 2007, 2nd European Reward Management Conference 2009, EASSET 2009, EARIE 2010 and Jornadas de Economía Industrial 2010 for useful discussions and suggestions

Should Shareholders Be Entitled to a Vote on Executive Compensation? A Critical Survey

Texto dispoñible en galego e españolOs escándalos corporativos das últimas décadas demostraron que unhas boas medidas de control corporativo non son só unha necesidade moral, senón tamén económica. Un mecanismo de goberno corporativo que actualmente está no punto de mira é o «say-on-pay», unha forma de activismo accionarial que lles permite aos accionistas votar as políticas de remuneración das súas empresas. Os defensores da implementación do «say-on-pay» por lei argumentan que é a existencia do «problema da remuneración aos executivos», ademais doutros argumentos de carácter máis político e social, o que xustifica esta intervención lexislativa. Neste traballo discútense razóns de tipo económico que restan atractivo á idea de dotar aos accionistas do dereito a votar os plans de remuneración dos seus executivosLos escándalos corporativos de las últimas décadas han demostrado que unas buenas medidas de control corporativo no son solo una necesidad moral, sino también económica. Un mecanismo de gobierno corporativo actualmente en el punto de mira es el «say-on-pay», una forma de activismo accionarial que permite a los accionistas votar las políticas de remuneración de sus empresas. Los defensores de la implementación del «say-on-pay» por ley argumentan que es la existencia del «problema de la remuneración a ejecutivos», además de otros argumentos de carácter más político y social, lo que justifica esta intervención legislativa. En este trabajo se discuten razones de tipo económico que restan atractivo a la idea de dotar a los accionistas del derecho a votar los planes de remuneración de sus ejecutivosCorporate scandals within the last two decades have shown that good corporate con-trol systems are not only a moral claim but also an economic need. A mechanism of corporate governance currently in the spotlight is “say-on-pay”, a form of shareholder activism that repre-sents the capacity of shareholders to vote on executive compensation policies. Proponents of implementing “say-on-pay” by law argue that it is the existence of an “executive compensation problem”, jointly with different political and social arguments, what justifies legislative interven-tion. In this study, we discuss some economic reasons that minimize the appeal to entitle share-holders to a vote on executive compensationS

Performance pay, firm size and export market participation: Evidence from matched employer–employee data

Financiado para publicación en acceso aberto: Universidade de Vigo/CISUGThe objective of this paper is to provide new evidence on the link between firm level characteristics (size and export) and the adoption of performance pay as part of worker remuneration. Our study exploits an employer–employee database with information on more than 200,000 workers at 26,055 Spanish firms. We find that the incidence of performance pay usually increases with firm size (at decreasing rates) and export status. However, we detect a wide variation among occupations, both in the prevalence of the two types of performance pay analysed and their relationship with size and export.Agencia Estatal de Investigación | Ref. RTI2018-099403-B-I0

Deberían os accionistas poder votar a retribución dos executivos?: unha revisión crítica

Los escándalos corporativos de las últimas décadas han demostrado que unas bue-nas medidas de control corporativo no son solo una necesidad moral, sino también económica. Un mecanismo de gobierno corporativo actualmente en el punto de mira es el «say-on-pay», una forma de activismo accionarial que permite a los accionistas votar las políticas de remune-ración de sus empresas. Los defensores de la implementación del «say-on-pay» por ley argu-mentan que es la existencia del «problema de la remuneración a ejecutivos», además de otros argumentos de carácter más político y social, lo que justifica esta intervención legislativa. En es-te trabajo se discuten razones de tipo económico que restan atractivo a la idea de dotar a los accionistas del derecho a votar los planes de remuneración de sus ejecutivos

Executive Pay with Observable Decisions

We propose a model of delegated expertise designed to analyze executive compensation. An expert has to pick one of two possible decisions. By exerting effort the expert can obtain private information on these decisions. The expert’s decision and its ultimate performance realization are publicly observed, but the expert’s information is not. In other words, the principal observes the expert’s decision and its realization, but does not know whether the expert expended effort to obtain information and whether he made an efficient decision conditional on the information he received. We characterize the optimal compensation contract among those that give the expert incentives to obtain information to determine the efficient decision and to make the decision that is efficient contingent on the obtained information. We show that: 1) It is generically optimal to make pay contingent on the decision made by the expert, not only on performance; 2) The expert is often rewarded for choosing alternatives that are ex-ante inefficient. 3) When decisions differ in their complexity, optimal pay-performance may be zero if the expert chooses the complex alternative. Our model highlights novel factors that should be considered in the design of executive compensation contracts, sheds light on existing compensation practices, such as rewarding executives for acquisitions, and suggests mechanisms to promote managerial innovation.