Posts Tagged ‘Rajiv Banker’

The Relation between CEO Compensation and Past Performance

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Wednesday November 7, 2012 at 9:48 am
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Editor’s Note: The following post comes to us from Rajiv Banker, Professor of Accounting at Temple University; Masako Darrough, Professor of Accountancy at City University of New York; Rong Huang, Assistant Professor of Accountancy at City University of New York; and Jose Plehn-Dujowich, Assistant Professor Accounting at Temple University.

Most of the empirical work on executive compensation investigates the role of contemporaneous performance measures in setting cash compensation, ignoring the relevance of past performance measures and the structure of cash compensation. In our paper, The Relation between CEO Compensation and Past Performance, forthcoming in The Accounting Review, we focus on the relation between cash compensation components (salary and bonus) and past performance measures as signals of a CEO’s ability.

We first develop a simple two-period principal-agent model with moral hazard and adverse selection. Our model suggests that salary is adjusted to meet the reservation utility and information rent, and is positively correlated over time to reflect ability. Bonus serves to address moral hazard and adverse selection problems by separating agents into contracts with different levels of risk. Agents are screened and receive different bonus arrangements according to their types. The higher an agent’s type, the more sensitive his bonus is to contemporaneous performance. A higher ability agent receives a larger portion of his compensation in the form of bonus and less as salary. For a given agent, salary increases with his past performance and higher current salary predicts higher future performance. Current bonus, however, is negatively correlated with both past and future performance.

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Executive Compensation and R&D Intensity

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Wednesday September 14, 2011 at 9:19 am
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Editor’s Note: The following post comes to us from Rajiv Banker, Professor and Merves Chair of Accounting and Information Technology at Temple University; Dmitri Byzalov, Assistant Professor of Accounting at Temple University; and Chunwei Xian, Assistant Professor of Accounting at Northeastern Illinois University.

In our paper, Executive Compensation and Research & Development Intensity, which was recently made publicly available on SSRN, we examine the mediating effect of R&D intensity on the weights on signals of ability and financial performance measures in executive compensation contracts. There are many prior studies that investigate the impact of R&D intensity on total executive compensation (e.g., Dechow and Sloan 1991; Kwon and Yin 2006; Cheng 2004). However, prior studies did not incorporate adverse selection in their analysis. In other words, they did not investigate how R&D intensity affects the role of managerial ability in executive compensation. In contrast, we investigate how R&D intensity impacts the weights placed on human capital measures such as technical work experience, science and engineering degrees, and past experience in R&D intensive firms.

…continue reading: Executive Compensation and R&D Intensity

 
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