Career-Risk Concerns, Information Effort, and Optimal Pay-for-Performance Sensitivity

Prior work has established that managers' concerns about the level of their future compensation (i.e., implicit incentives from career concerns) may substitute for explicit incentives in compensation contracts offered to the managers in a single-task setting (Gibbons and Murphy 1992). We show t...

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Bibliographic Details
Published in:Journal of management accounting research 2015-09, Vol.27 (2), p.165-195
Main Authors: Chen, Qi, Dikolli, Shane S., Jiang, Wei
Format: Article
Language:English
Subjects:
Compensation
Executive compensation
Management theory
Pay for performance
Reputations
Risk assessment
Studies
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Summary:Prior work has established that managers' concerns about the level of their future compensation (i.e., implicit incentives from career concerns) may substitute for explicit incentives in compensation contracts offered to the managers in a single-task setting (Gibbons and Murphy 1992). We show that the substitution effect can be weakened, and even reversed, when managers (1) exert effort, in addition to production effort, to influence information about their ability, and (2) are concerned about both the level and variability of their reputation. We also find that managerial concern about the variability of reputation can lead to the optimal pay-for-performance sensitivity increasing in the underlying risk measure, rather than decreasing in risk, as in standard incentive-risk trade-offs. We test these predictions using a large sample of CEO compensation outcomes. Results are consistent with our model predictions.
ISSN:1049-2127
1558-8033
DOI:10.2308/jmar-51165