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The economic psychology of incentives: An international study of top managers

Listed author(s):
  • Pepper, Alexander
  • Gore, Julie
Registered author(s):

    The 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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    File URL: http://www.sciencedirect.com/science/article/pii/S1090951613000412
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    Article provided by Elsevier in its journal Journal of World Business.

    Volume (Year): 49 (2014)
    Issue (Month): 3 ()
    Pages: 350-361

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    Handle: RePEc:eee:worbus:v:49:y:2014:i:3:p:350-361
    DOI: 10.1016/j.jwb.2013.07.002
    Contact details of provider: Web page: http://www.elsevier.com/wps/find/journaldescription.cws_home/620401/description#description

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