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Incentive schemes for executive officers when forecasts matter

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  • Joaquim Vergés

    (Department of Business Economics & Administration, Universitat Autònoma 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.

Suggested Citation

  • Joaquim Vergés, 2010. "Incentive schemes for executive officers when forecasts matter," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 31(5), pages 339-352.
  • Handle: RePEc:wly:mgtdec:v:31:y:2010:i:5:p:339-352
    DOI: 10.1002/mde.1487
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    File URL: http://hdl.handle.net/10.1002/mde.1487
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    References listed on IDEAS

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    1. Xavier Freixas & Roger Guesnerie & Jean Tirole, 1985. "Planning under Incomplete Information and the Ratchet Effect," Review of Economic Studies, Oxford University Press, vol. 52(2), pages 173-191.
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    6. Murphy, Kevin J., 1999. "Executive compensation," Handbook of Labor Economics,in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 38, pages 2485-2563 Elsevier.
    7. Mishra, Chandra S. & McConaughy, Daniel L. & Gobeli, David H., 2000. "Effectiveness of CEO pay-for-performance," Review of Financial Economics, Elsevier, vol. 9(1), pages 1-13.
    8. Jensen, Michael C & Murphy, Kevin J, 1990. "Performance Pay and Top-Management Incentives," Journal of Political Economy, University of Chicago Press, vol. 98(2), pages 225-264, April.
    9. Ruth Bender & Lance Moir, 2006. "Does ‘Best Practice’ in Setting Executive Pay in the UK Encourage ‘Good’ Behaviour?," Journal of Business Ethics, Springer, vol. 67(1), pages 75-91, August.
    10. Coughlan, Anne T & Narasimhan, Chakravarthi, 1992. "An Empirical Analysis of Sales-Force Compensation Plans," The Journal of Business, University of Chicago Press, vol. 65(1), pages 93-121, January.
    11. Holmstrom, Bengt, 1982. "Design of incentive schemes and the new Soviet Incentive model," European Economic Review, Elsevier, vol. 17(2), pages 127-148.
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