Management Team Incentive Dispersion and Firm Performance

57 Pages Posted: 15 Mar 2012 Last revised: 16 May 2016

See all articles by Robert M. Bushman

Robert M. Bushman

University of North Carolina Kenan-Flagler Business School

Zhonglan Dai

University of Texas at Dallas - School of Management

Weining Zhang

Cheung Kong Graduate School of Business

Date Written: March 11, 2015

Abstract

Recent theory suggests that firms incorporate synergistic interrelationships among executives into optimal incentive design (Edmans et al. 2013). We focus on Pay Performance Sensitivities (PPS) and use dispersion in PPS across top executives as a proxy for the incentive design component shaped by an executive team’s synergy profile. We model optimal PPS dispersion and use residuals from this model to measure deviations from optimal. We find that firm performance is increasing (decreasing) in the residual when PPS dispersion is too low (too high). We conjecture that deviations from optimal are sustained by adjustment costs, finding that firms only close around 60% of the gap between target and actual PPS dispersion over the subsequent year. Viewing a team’s equity grants as a vector, we provide evidence that firms use subsequent equity grants to actively manage PPS dispersion towards optimality. Cross-sectional analysis reveals that the deleterious effect of deviations from optimal is decreasing in the duration of a team’s tenure together, and increasing in the importance of effort coordination across team members for firm performance.

Keywords: team incentive dispersion; firm performance; PPS; cooperation

JEL Classification: M41

Suggested Citation

Bushman, Robert M. and Dai, Zhonglan and Zhang, Weining, Management Team Incentive Dispersion and Firm Performance (March 11, 2015). Accounting Review, January 2016, Vol. 91, No. 1, 21-45. Available at SSRN: https://ssrn.com/abstract=2022453 or http://dx.doi.org/10.2139/ssrn.2022453

Robert M. Bushman (Contact Author)

University of North Carolina Kenan-Flagler Business School ( email )

McColl Building
Chapel Hill, NC 27599-3490
United States
919-962-9809 (Phone)

HOME PAGE: http://public.kenan-flagler.unc.edu/faculty/bushmanr/

Zhonglan Dai

University of Texas at Dallas - School of Management ( email )

2601 North Floyd Road
Richardson, TX 75083
United States

Weining Zhang

Cheung Kong Graduate School of Business ( email )

Oriental Plaza, Tower E3
One East Chang An Avenue
Beijing, 100738
China

HOME PAGE: http://english.ckgsb.edu.cn/FacultyResearch/Faculty/Accounting/ZhangWeining.aspx

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