Tuesday, August 1, 2006


Sensitivity of CEO Wealth to Stock Price: A New Tool For Assessing Pay for Performance

In recent years, there has been considerable debate as to whether CEO compensation is actually correlated with performance in U.S. companies. Why don’t shareholders and stakeholders examine the relation between CEO wealth and stock price to measure pay for performance and detect the potential for “excessive” risk taking, asks Professor David Larcker.

Eliminating Sales Quotas May Stimulate Profits

Eliminating sales quotas boosts company profits says Professor Harikesh Nair. In one case, the new sales compensation plan without quotas resulted in a 9% improvement in overall revenues, which translates to about $1 million of incremental revenues per month.

Executive Stock Options Boost Company Performance But Options to Rank-and-File Workers Show Minimal Effect

Stock options have a positive effect on firm performance when they are granted to executives, but giving options to lower-ranking employees seems to have no effect on the bottom line according to a new study co-authored by Stanford Graduate School of Business Professor Ron Kasznik.

Incentives for Employees in Just-in-Time Settings

In some manufacturing environments, having workers engage in just-in-time production can actually cause motivational problems and increase costs. The answer is to make sure employees' pay is tied to their actual productivity—and that means allowing for bad days and, consequently, some inventory build-up.

Financial Incentives Can Create Bad Employee Behavior Financial incentives, including commissions, should be used only to recognize good employee performance. They can backfire if used to try to influence behavior, says Professor Jeffrey Pfeffer.

Time IS Money When You're Paid by the Hour People who are used to being paid by the hour start thinking of time as a commodity almost equal to cash. They can tell you how much it will "cost" them to wash the car or go to a movie. And given the choice, they're nearly always willing to put in more hours to get more pay, say researchers Jeffrey Pfeffer and Sanford E. DeVoe. (August 2006)

CEO Skill and Excessive Pay: A Breakdown in Corporate Governance? A high salary doesn't necessarily mean that a CEO is more competent than his or her peers, say researchers. And the pattern of pay being linked negatively to job skill seems to affect more CEOs of large firms than small ones. (February 2005)

Recognize Economic Realities to Expense Stock Options A simple accounting system based on 90-day option prices may be the answer to the current debate over expensing stock options. Economists Jeremy Bulow and John Shoven say their proposal gives firms flexibility and produces objective, transparent, and decision-relevant information. (July 2004)

Economic Incentives Do Inspire New Products—But Only to a Point Offering a product development manager a 30 percent bonus to bring new items to market quickly will produce optimal results in most cases. But Prof. Antonio Davila says if the product is really complex and the market is uncertain, a bonus as small as 10 percent may inspire the best results. The key is to tailor financial incentives to the task at hand to get the desired results. (October 2003)

Measuring Executive Accountability Shareholders are demanding incentives to force executives to focus on creating corporate value. This trend may mean that managers are less willing to engage in projects that increase value way down the line, value that isn't measured—and therefore rewarded—now. (May 2002)

Anchoring Employees with the Lure of Stock Options Although some argue that stock options are a lousy way to motivate employees, research shows they can serve as good salary buffers to keep workers from leaving when salaries or other benefits start to rise in the labor market around them. (August 2001)

Stock Options, It’s all in the Timing Research shows that some top executives manage the timing of key company announcements, such as earnings projections, to increase the worth of stock options they receive. (June 1999)

Wage Imbalance Between CEO and Workers Sends a Bad Message Huge imbalances between salaries of CEO and the top executives who work for them can lead to high turnovers of talented workers and can even trickle down, creating a bad atmosphere among the rank and file. (March 1997)

What's in it for Fund Managers? Compensating mutual fund managers managing active funds by benchmarking their fund's performance against an index has some potentially serious drawbacks. The use of benchmarks distorts the way a manager uses information because the manager's and the investor's goals are no longer the same say two Stanford Graduate School of Business researchers. (September 1996)

CEO Pay and Compensation Boards To really understand CEO pay, you need to look at the social setting in which decisions about salaries, bonuses, and long-term incentives are made. Prof. Charles O'Reilly says social dynamics within the compensation committee—not the labor market—have a dramatic effect on CEO compensation. (1995)