Abstract

http://ssrn.com/abstract=1910819
 
 

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Accounting for Net Performance in Managerial Compensation Contracts


Shane S. Dikolli


Duke University - Fuqua School of Business

Christian Hofmann


Ludwig-Maximilians-Universität München - Faculty of Business Administration (Munich School of Management)

Thomas Pfeiffer


University of Vienna - Accounting and Control

March 5, 2012

AAA 2012 Management Accounting Section (MAS) Meeting Paper

Abstract:     
Prior empirical compensation studies typically consider net performance (i.e., measured after deducting compensation) while related principal-agent theory is generally based on gross performance measures (i.e., before compensation). We analyze incentive rates in a principal-agent model based on net (and gross) performance. We analytically demonstrate that using gross performance in compensation regressions yields an unbiased estimate of total effort incentives irrespective of whether actual compensation is based on net or gross performance. In contrast, using net performance creates a bias in estimating total effort incentives and yields a non-zero benchmark in testing for the strong-form relative performance evaluation hypothesis. We provide empirical evidence of underestimated total effort incentives when using net performance in compensation regressions, suggesting a possible explanation for surprisingly weak CEO incentives interpreted in prior studies.

Number of Pages in PDF File: 42

Keywords: Executive Compensation, Relative Performance Evaluation, Performance Measurement

JEL Classification: J33, M40, M46

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Date posted: August 17, 2011 ; Last revised: March 6, 2012

Suggested Citation

Dikolli, Shane S. and Hofmann, Christian and Pfeiffer, Thomas, Accounting for Net Performance in Managerial Compensation Contracts (March 5, 2012). AAA 2012 Management Accounting Section (MAS) Meeting Paper. Available at SSRN: http://ssrn.com/abstract=1910819 or http://dx.doi.org/10.2139/ssrn.1910819

Contact Information

Shane Sami Dikolli (Contact Author)
Duke University - Fuqua School of Business ( email )
100 Fuqua Drive
Box 90120
Durham, NC 27708-0120
United States
919-660-1949 (Phone)
919-869-1901 (Fax)
Christian Hofmann
Ludwig-Maximilians-Universität München - Faculty of Business Administration (Munich School of Management) ( email )
Kaulbachstr. 45
Munich, 80539
Germany
Thomas Pfeiffer
University of Vienna - Accounting and Control ( email )
Bruenner Strasse 72
Vienna 1210, Vienna
Austria
+43-1-4277-38002 (Phone)
+43-1-4277-38004 (Fax)
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