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1) Measuring Inputs vs. Measuring Outputs

2) Designing the Optimal Incentive Contracts

3) Relative Performance Evaluation本论文由英语论文网 www.51lunwen.org整理提供

4) Accounting vs. Stock based compensation

1: Measuring Inputs vs. Measuring Outputs
Measuring Inputs (Monitoring)
Specify rewards to manager for each action (decision) that is ex-ante desirable to shareholders
Measuring Outputs (Incentive Compensation)
Compensate the manager if the outcome of her decisions is ex-post desirable to the shareholders

Even if you can effectively measure the quantity of inputs, in practice, measuring the quality of inputs can be very costly. It is also hard to specify a bonus based on these inputs. We may need to reward based on outputs.
Example
Should a football coach be compensated based on the number of wins by the team?

2: Designing the Optimal Incentive Contracts

So say the manager is rewarded based on results (output). How should the pay be related to that output?
Note that: Output = Effort + “Luck”
Basic Trade-off
If fixed wage is paid, manager will not exert any costly effort!
If high-powered compensation (aggressively based on output) is used, manager (rather than shareholders) is subject to excessive undiversifiable risk (“luck”) which makes its use expensive for shareholders
Need to balance the use of incentive compensation to increase effort while reducing the costs of inefficient risk bearing by the manager
Example
In exchange programs, a reduction of $1 in CEO fixed wages is compensated (on average) with $2 to $3 increases in options or $1.2 to $1.3 in restricted stock

Factors that favor high incentive pay

Effort has strong impact on output
Output has low sensitivity to risk factors outside manager’s control
Manager is not very risk averse
Effort is not very costly to manager本论文由英语论文网 www.51lunwen.org整理提供
Remarks:
1. Variable compensation per se (unless it affects incentives) is more costly for firms. The manger is rewarded for luck.
2. Managerial ownership has advantages. Makes employee “internalize” costs and benefits of effort (and so to make “right” effort decisions) …and disadvantages: Limited by wealth constraints, risk aversion and team production

Executive Stock Options

Options cost shareholders more than they are worth to executives, so options should only be granted if sufficiently positive incentive effects
May bias CEO away from dividends in favor of share repurchases
Tend to create greater risk appetite
Lose incentive effect if they are out of the money

Relative Performance Evaluation (RPE)

Relative performance evaluation is a smart way to eliminate the effect of some of the risks that are beyond the manager’s control. (movements in the overall market or industry)
The disadvantage is that they may cause firms to compete too aggressively, which could reduce the firm’s profits. The CEO can get a bonus for increasing market share but this can reduce profits…
Only 20 percent of companies tie their executives annual bonus to the relative performance of their firm (1999 survey)
Stock options and restricted stocks are 本论文由英语论文网提供整理，提供论文代写，英语论文代写，代写论文，代写英语论文，代写留学生论文，代写英文论文，留学生论文代写相关核心关键词搜索。