The economic psychology of incentives: An international study of top managers

Pepper, Alexander; Gore, Julie

doi:10.1016/j.jwb.2013.07.002

Cited by 35 publications

(23 citation statements)

References 66 publications

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“…Consistent with other studies, Hermanson et al (2012, p.667) Pepper and Gore (2014) and to survey the incidence of remuneration principles in codes and corporate annual reports, extending the work of Zajac and Westphal (1995), Wade et al (1997) and Point and Tyson (2006). Table 3 presents a range of remuneration practices, how remuneration principles influence those practices, and other relevant findings from prior qualitative research.…”

Section: Remuneration Principlessupporting

confidence: 56%

“…Operationalising the remuneration principles will require remuneration committees to make many decisions that may vary across organisations, industries, countries, time periods, etc. (Malsch, Tremblay and Gendron, 2012;Pepper and Gore, 2014); these differences are not explored in this paper.…”

Section: Remuneration Principlesmentioning

confidence: 99%

“…However, this level of complexity is not rational because the computational capabilities of executives are bounded and they cannot possibly choose the course of action that maximises their remuneration (Main, Jackson, Pymm and Wright, 2008;Pepper et al, 2013). Thus, the institutionalisation of Agency Logic has resulted in a kind of madness, where increasingly complex incentive schemes are touted as the cure to corporate failures and perceived executive greed (Murphy, 2013;Murphy and Jensen, 2011), despite the reality that executives heavily discount the value of complex and long-term incentive schemes (Pepper et al, 2013;Pepper and Gore, 2014).…”

Section: Remuneration Practicesmentioning

confidence: 99%

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Executive remuneration principles, practices and processes: an institutional logics perspective

Crombie

2015

IJCG

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Agency Logic assumes that executives are greedy and opportunistic, which implies that monetary incentives are necessary to ensure they act in the best interests of shareholders; whereas Corporate Logic assumes that executives are trustworthy professionals, which implies that they will act in the best interests of shareholders irrespective of the use of monetary incentives. Prior qualitative research on executive remuneration is reviewed in this paper in order to ascertain how these Logics influence the decision-making of remuneration committees. Given that Agency Logic and Corporate Logic are opposites, there is a tension between the remuneration principles of pay-for-performance and competitive pay. However, Corporate Logic trumps Agency Logic as remuneration committees prioritise competitive pay ahead of other principles, so that talented executives will be retained. The paper also Executive Remuneration Principles, Practices and ProcessesPage 2 discusses a range of other remuneration principles and practices as well as the remuneration processes that have diffused both Logics amongst remuneration committees.

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Section: Remuneration Principlessupporting

confidence: 56%

Section: Remuneration Principlesmentioning

confidence: 99%

Section: Remuneration Practicesmentioning

confidence: 99%

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Executive remuneration principles, practices and processes: an institutional logics perspective

Crombie

2015

IJCG

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“…Neither theory takes into account equity considerations (Bowie & Freeman, 1992;O'Reilly, Main, & Crystal, 1988). However, in recent years a number of management scholars have advanced a new version of agency FAIRNESS, ENVY, etc. theory based on more realistic assumptions about behavior (Pepper & Gore, 2012, 2014Pepper, Gore, & Crossman, 2013;Rebitzer & Taylor, 2011;Sanders & Carpenter, 2003;Wiseman & Gomez-Mejia, 1998). The intention has been to construct a better theoretical account of executive compensation and agent motivation.…”

Section: Introductionmentioning

confidence: 99%

Fairness, envy, guilt and greed: Building equity considerations into agency theory

2015

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In this paper we examine the extent to which fairness considerations are salient to senior executives and consider the implications for agency theory, tournament theory, and the design of top-management incentives. We look for patterns in a unique data set of senior executive preferences and seek explanations for these patterns using a model of fairness first advanced by Fehr & Schmidt (1999). We propose a number of amendments to Fehr & Schmidt's model. We challenge some of the standard tenets of agency theory and tournament theory, demonstrating why equity considerations should be taken into account.We add to the growing literature on behavioural agency theory.

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“…Thirdly, intrinsic motivation is much more important than admitted by traditional economic theory, to the point where many executives would give up over 28% of their income to work in more personally satisfying roles. (Pepper & Gore, 2014). Finally, fairness matters.…”

mentioning

confidence: 99%

Applying economic psychology to the problem of executive compensation.

Pepper

2017

The Psychologist-Manager Journal

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LSE has developed LSE Research Online so that users may access research output of the School. Copyright © and Moral Rights for the papers on this site are retained by the individual authors and/or other copyright owners. Users may download and/or print one copy of any article(s) in LSE Research Online to facilitate their private study or for non-commercial research. You may not engage in further distribution of the material or use it for any profit-making activities or any commercial gain. You may freely distribute the URL (http://eprints.lse.ac.uk) of the LSE Research Online website. This document is the author's final accepted version of the journal article. There may be differences between this version and the published version. You are advised to consult the publisher's version if you wish to cite from it. 1Applying economic psychology to the problem of executive compensation to align their interests with shareholders. As far as possible the use of equity plans, especially complex, high-powered, performance-based plans should be kept to a minimum.Keywords: economic psychology, executive compensation, motivation theory 3The conventional design of executive compensation plans, involving high salaries, generous bonuses and highly-leveraged stock programs, is based on an outdated model of executive agency. The general principal-agent model focuses on bilateral arrangements where a principal (conventionally "her") hires an agent (conventionally "him") to carry out some activity on her behalf (Eisenhardt, 1989). In its more specific application to companies, agency theory postulates, among other things, that in order to motivate managers (agents) to carry-out actions and select effort levels that are in the best interests of shareholders (principals), boards of directors, acting on behalf of shareholders, must design high-powered performance-based incentive contracts which make an agent's compensation contingent on measurable performance outcomes (Jensen & Meckling, 1976). Critically, agency theory makes the assumptions that executives are rational, self-interested, utility-maximizers, motivated only by money.It has been apparent for some time that agency theory has major shortcomings. Research These factors suggest that conventional methods of compensating executives are contributing to the rapid inflation in executive pay, rather than incentivizing executives to maximize their performance. Long-term incentive plans are actually increasing agency costs rather than providing a way of reducing them. Companies have to offer the possibility of everlarger pay-offs to counter the reduced subjective values that executives attach to their awards. The ResearchWhereas agency theory focuses on how incentive contracts can be best designed to align the interests of shareholders (principals) and executives (agents), our research, drawing on ideas from economic psychology and behavioral economics, focuses on agent motivation. The theory of work motivation most commonly used by psychologists when investigating the motivational i...

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The economic psychology of incentives: An international study of top managers

Cited by 35 publications

References 66 publications

Executive remuneration principles, practices and processes: an institutional logics perspective

Executive remuneration principles, practices and processes: an institutional logics perspective

Fairness, envy, guilt and greed: Building equity considerations into agency theory

Applying economic psychology to the problem of executive compensation.

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