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Incentive schemes for executive officers when forecasts matter

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  • Joaquim Vergés

    (Department of Business Economics & Administration, Universitat Aut�noma de Barcelona, Barcelona, Catalonia, Spain)

Abstract

This paper develops a new perspective on results-based incentive schemes for non-CEO managers. It shows that it is possible to establish incentive schemes that take into account both the actual output obtained and the forecast figure previously established as a target, without the negative consequences derived from the perverse loop of hiding-ratchet effects. A general linear two-staged scheme is proposed. In addition, relevant properties of this incentive system are stated that show how principals (corporate management) may determine the expected forecasting behavior of agents (executive officers) by suitably choosing the scheme parameters according to a simple set of rules. Copyright © 2009 John Wiley & Sons, Ltd.

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File URL: http://hdl.handle.net/10.1002/mde.1487
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Article provided by John Wiley & Sons, Ltd. in its journal Managerial and Decision Economics.

Volume (Year): 31 (2010)
Issue (Month): 5 ()
Pages: 339-352

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Handle: RePEc:wly:mgtdec:v:31:y:2010:i:5:p:339-352

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Web page: http://www3.interscience.wiley.com/cgi-bin/jhome/7976

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  1. Aron, Debra J & Olivella, Pau, 1994. "Bonus and Penalty Schemes as Equilibrium Incentive Devices, with Application to Manufacturing Systems," Journal of Law, Economics and Organization, Oxford University Press, Oxford University Press, vol. 10(1), pages 1-34, April.
  2. Freixas, Xavier & Guesnerie, Roger & Tirole, Jean, 1985. "Planning under Incomplete Information and the Ratchet Effect," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 52(2), pages 173-91, April.
  3. David De Meza & David C Webb, 2006. "Incentive Design under Loss Aversion," FMG Discussion Papers, Financial Markets Group dp571, Financial Markets Group.
  4. Bengt Holmstrom, 1979. "Design of Incentive Schemes and the New Soviet Incentive Model," Discussion Papers, Northwestern University, Center for Mathematical Studies in Economics and Management Science 456, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  5. Coughlan, Anne T & Narasimhan, Chakravarthi, 1992. "An Empirical Analysis of Sales-Force Compensation Plans," The Journal of Business, University of Chicago Press, University of Chicago Press, vol. 65(1), pages 93-121, January.
  6. Ellman,Michael, 1989. "Socialist Planning," Cambridge Books, Cambridge University Press, Cambridge University Press, number 9780521358668.
  7. John, George & Weiss, Allen M & Weitz, Barton, 1987. "An Organizational Coordination Model of Salesforce Compensation Plans: Theoretical Analysis and Empirical Test," Journal of Law, Economics and Organization, Oxford University Press, Oxford University Press, vol. 3(2), pages 373-95, Fall.
  8. Jensen, M.C. & Murphy, K.J., 1988. "Performance Pay And Top Management Incentives," Papers, Rochester, Business - Managerial Economics Research Center 88-04, Rochester, Business - Managerial Economics Research Center.
  9. Mishra, Chandra S. & McConaughy, Daniel L. & Gobeli, David H., 2000. "Effectiveness of CEO pay-for-performance," Review of Financial Economics, Elsevier, Elsevier, vol. 9(1), pages 1-13.
  10. Ruth Bender & Lance Moir, 2006. "Does ‘Best Practice’ in Setting Executive Pay in the UK Encourage ‘Good’ Behaviour?," Journal of Business Ethics, Springer, Springer, vol. 67(1), pages 75-91, August.
  11. Murphy, Kevin J., 1999. "Executive compensation," Handbook of Labor Economics, Elsevier, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 38, pages 2485-2563 Elsevier.
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