The economic psychology of incentives: an international study of top managers
AbstractThe world-wide inflation in executive compensation in recent years has been accompanied by an increase in the prevalence of long-term incentives. This article demonstrates how the subjectively perceived value of long-term incentives is affected by risk aversion, uncertainty aversion, and time preferences. Based on a unique empirical study which involved collecting primary data on executive preferences from around the world, and using a theoretical framework which draws on behavioral agency theory, we conclude that, while long-term incentives are perceived by executives to be effective, they are not in fact an efficient form of reward, and that this outcome is not significantly affected by cross-cultural differences. We conjecture that boards of directors, acting on behalf of shareholders, increase the size of long-term incentive awards in order to compensate executives for the perceived loss of value when compared with less risky, more certain and more immediate forms of reward.
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Bibliographic InfoPaper provided by London School of Economics and Political Science in its series Open Access publications from London School of Economics and Political Science with number http://eprints.lse.ac.uk/51655/.
Date of creation: 2013
Date of revision:
Publication status: Published in Journal of world business (2013) v., p.-
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This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-08-23 (All new papers)
- NEP-CBE-2013-08-23 (Cognitive & Behavioural Economics)
- NEP-HRM-2013-08-23 (Human Capital & Human Resource Management)
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