Compensation Schemes based on Residual Income: A Concept to achieve strong Goal Congruence
This paper examines compensation schemes in order to induce efficient investment decisions by a manager. The problem under investigation is the manager's "impatience". A shorter time horizon or higher personal cost of capital may induce him to underinvest relative to the efficient investment level. A possible solution for this problem was provided by Rogerson (1997). He provides an allocation rule which leads to a positive residual income in each period if and only if the net present value of the project is positive and therefore leads to strong goal congruence. Thus, if the manager is rewarded based on adjusted residual income, he will choose the efficient investment level regardless of his own time preferences or time horizon. In this paper, we show that strong goal congruence is also attainable by special compensation functions. In this context we provide a periodic performance measure of value creation and value realization.
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|Date of creation:||20 Jul 2007|
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