The Impact of the Reward Structure on Stickiness

Abstract

Prior research has related cost stickiness to characteristics of the firm’s costs structure and managerial decisions. In this paper, I study the impact of the relative level of short term oriented bonuses in the manager’s reward system on stickiness. When managers have a relatively higher level of annual bonuses they have more incentives to decrease their firm’s resource level immediately after a decrease in sales. When the annual bonus is a smaller part of the total reward package, they might wait longer before they decrease the resource level, because sales might increase again in the near future.

Based on a sample of 2569 firms (16,033 firm-years) that are included in the Executive Comp database, I find that a higher percentage of bonuses in the total reward package leads to a lower stickiness level. These results are robust against the inclusion of a number of controls that capture the impact of the firm’s cost structure on stickiness.