Beyond Economics: Behavioral Dynamics in Pay for Performance
73 Pages Posted: 28 Jan 2013 Last revised: 14 Jun 2013
Date Written: January 25, 2013
This article argues that while much of the intellectual energy has focused on the economics of executive pay, the challenge of executive compensation is as much a challenge of human behavior as it is one of economics. The raison d’etre of pay for performance (PFP) is to motivate executives to make decisions that are in the best interest of their firm and its shareholders. Attention to the relevant individual, situational, cultural, and institutional dynamics (what I term “behavioral dynamics”) that affect how executives are motivated and how they value future rewards is critical for the sustainability of PFP as a model of compensation design.
Drawing on salient research in the cognitive science and decision-making literature, the article invites consideration on how relevant behavioral dynamics could affect our assessment of PFP as a motivational tool. The article concludes by suggesting five potential ways to incorporate behavioral dynamics into compensation policy and design.
Keywords: executive compensation, behavioral economics, behavioral corporate law, behavioral, decision-making, cognitive science, pay for performance, corporate, corporate governance, incentive pay
JEL Classification: D80, D81, D90, G30, G34, K20, K22
Suggested Citation: Suggested Citation