Self-Sorting, Incentive Compensation and Human-Capital Assets

39 Pages Posted: 17 May 2014 Last revised: 3 May 2016

See all articles by A. Rashad Abdel-Khalik

A. Rashad Abdel-Khalik

University of Illinois at Urbana-Champaign - Department of Accountancy

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Date Written: January 15, 2003

Abstract

Skilled labour has gained significance as a production factor in the age of information technology, but accounting does not recognize human capital as an asset that contributes to the firm’s earning power. This paper suggests a method to develop a latent index to proxy the managerial-skill component of human capital. The proposed index depends on the empirical validity of self-sorting theories for managerial tasks and the choice of the type of at-risk (i.e. outcome-contingent) compensation contract. The empirical analysis uses data on compensation of executive members of the board of directors, their personal attributes (experience, risk aversion and wealth), firm-specific variables ( profitability growth rates, organizational complexity and operating risk), and type of industry. The extent to which equity markets value the predicted labour skills shows that investors in the marketplace recognize human capital even though accounting does not. The valuation coefficient on the variable imputed for human capital is significant for all years examined. This study contributes to the literature by showing that relative incentive compensation (incentive pay per dollar of fixed salary) is a viable surrogate for human capital defined as the skills embodied in people.

Keywords: Job Search, labor markets, compensation, matching skills and pay

JEL Classification: J24; J31; J33; J41

Suggested Citation

Abdel-Khalik, A. Rashad, Self-Sorting, Incentive Compensation and Human-Capital Assets (January 15, 2003). European Accounting Review Vol. 12, No. 4, 2003, Available at SSRN: https://ssrn.com/abstract=2437690

A. Rashad Abdel-Khalik (Contact Author)

University of Illinois at Urbana-Champaign - Department of Accountancy ( email )

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