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

Alexander Pepper and Julie Gore

Journal of World Business, 2014, vol. 49, issue 3, 350-361

Abstract: The world-wide inflation in executive compensation in recent years has been accompanied by an increase in the prevalence of long-term incentives. This article demonstrates how the subjectively perceived value of long-term incentives is affected by risk aversion, uncertainty aversion, and time preferences. Based on a unique empirical study which involved collecting primary data on executive preferences from around the world, and using a theoretical framework which draws on behavioral agency theory, we conclude that, while long-term incentives are perceived by executives to be effective, they are not in fact an efficient form of reward, and that this outcome is not significantly affected by cross-cultural differences. We conjecture that boards of directors, acting on behalf of shareholders, increase the size of long-term incentive awards in order to compensate executives for the perceived loss of value when compared with less risky, more certain and more immediate forms of reward.

Keywords: Agency theory; Behavioral economics; Executive compensation; Motivation; Long-term incentives (search for similar items in EconPapers)
Date: 2014
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Persistent link: https://EconPapers.repec.org/RePEc:eee:worbus:v:49:y:2014:i:3:p:350-361

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DOI: 10.1016/j.jwb.2013.07.002

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