Managers, consultants, and the financial press assert that compensation plans based on residual income change managers’ behavior. This assertion is empirically tested by selecting a sample of firms that began using a residual income performance measure in their compensation plans and comparing their performance to a control sample of firms that continue to use traditional accounting earnings-ba...

The practice of resetting strike prices on underwater executive stock options has drawn criticism for weakening managerial incentives. Our model shows that although the anticipation of resetting can negatively a ect initial incentives, resetting can still be an important, value-enhancing aspect of compensation contracts, even from an ex-ante standpoint. In fact, we nd that some resetting is alm...

This paper studies optimal relational contracts in motivating workers in a market setting. We find that labor markets with higher turnover costs will use more subjective performance pay and less efficiency wages and that in those markets, the total wage payment is lower and the equilibrium employment level is higher. Surprisingly, under certain conditions, an increase in turnover costs leads to...

Gender Pay Gaps among Highly Educated Professionals: Compensation Components Do Matter Making use of panel data from a survey of highly educated professionals, gender pay gaps are explored with regard to total compensation as well as to individual compensation components. The results indicate meaningful male-female wage differentials for this quite homogeneous group of people working in one spe...

Potential, Prizes and Performance: Testing Tournament Theory with Professional Tennis Data This paper tests two hypotheses from the theory of elimination tournaments: (i) that uneven tournaments, where the contestants are ex ante heterogeneous, entail lower effort exertion; this is a prediction from agency theory that has not been tested empirically before; and (ii) whether incentives set throu...

Many compensation schemes consist of cash ̄ow streams with different risk characteristics. For example, bonuses, which help align a ®rm's wage bill with business cycle ̄uctuations, are more variable than regular (®xed) pay. We investigate empirical regularities in compensation schemes involving risky pay which is contingent on certain random outcomes. Using data for Germany, Japan and the US, w...

Relative performance evaluation (RPE) in CEO compensation provides insurance against external shocks and yields a more informative measure of CEO actions. I argue that empirical evidence on the use of RPE is mixed because previous studies rely on a misspecified peer group. External shocks and flexibility in responding to the shocks are functions of, for example, the firm’s technology, the compl...

We investigate to what extent reciprocity, exhibited by employers and employees, lead to stable gift exchange practices in the labour contract, giving rise to noncompensating wage differentials among industries and firms. We use the concept of Sequential Reciprocity Equilibrium (Dufwenberg and Kirchsteiger 1998, 2004) to incorporate players’ preferences for reciprocity in their utility function...

This paper studies a strategic aspect of pro t-sharing in an oligopolistic industry with a monopoly union. Whenever a uniform pro t share exists in the industry, we show that a union that values the per worker remuneration positively, may have incentives to reduce industry employment, decreasing thus total output and causing total pro ts to increase. Thus, we show that pro t-sharing may lead to...

Performance Pay and Risk Aversion A main prediction of agency theory is the well known risk-incentive trade-off. Incentive contracts should be found in environments with little uncertainty and for agents with low degrees of risk aversion. There is an ongoing debate in the literature about the first trade-off. Due to lack of data, there has so far been hardly any empirical evidence about the sec...