An analysis of the use of accounting and market measures of performance in executive compensation contracts
Article Abstract:
The usage of accounting return on equity and security market return as performance measures in executive compensation plans is examined. It is hypothesized that the relative weight placed on a measure of performance by a firm in a compensation contract is an an increasing function of the firm's signal to noise' ratio with regards to the manager's actions. The results indicate that firms place more weight on measures of market performance than on measures of accounting performance in compensation contracts when: the variance of accounting measures is greater than variance of market measures of performance; the firm has high growth rates in sales and assets, and the manager has low personal holdings in his firm's stock. A discussion of the article by George P. Baker is included.
Publication Name: Journal of Accounting Research
Subject: Business
ISSN: 0021-8456
Year: 1987
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Portfolio considerations in valuing executive compensation
Article Abstract:
Portfolio considerations in valuing executive compensation were researched by analyzing the valuation of compensation contracts from the perspective of managers. Using a managerial perspective is appropriate since managers' actions influence the valuation of the compensation contract. Research focused on managers' aversion to risk and the nature of their other wealth in relation to valuing their compensation contracts. Research results revealed that risk-averse managers with a large proportion of other wealth related to the company's stock price valued a compensation contract less than the package's cost as perceived by shareholders. The value of the components of a compensation package are dependent on the structure of other components in the package.
Publication Name: Journal of Accounting Research
Subject: Business
ISSN: 0021-8456
Year: 1991
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An empirical investigation of the relative performance evaluation hypothesis
Article Abstract:
Agency theory implies that relative performance evaluation (RPE) of agents provides benefits when their performances are conditioned by common shock units. These shock units can be excluded from the agent's performance as this permits better evaluation. This RPE implication is the subject of attempts for validation. Previous research of RPE application for CEOs show various results. However, there is little evidence to indicate that RPE implications of standard agency models can be applied to CEO compensation. Studies do show that a CEO's total compensation package does not imply lack of RPE utility as an RPE contract's value depends on the executive's flexibility of choices for investment.
Publication Name: Journal of Accounting Research
Subject: Business
ISSN: 0021-8456
Year: 1992
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