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Performance appraisals, the evaluation of an employee’s job performance over the previous period by one’s supervisor, are a standard practice in virtually every organization. They are one of the most important, time-consuming, and unpopular tasks in management. Despite this, remarkably little is known about how performance appraisals operate, especially their consequences. Indeed, much of what is written from a practitioner perspective typically suggests that they do little. By contrast, we document empirical evidence of the importance of performance appraisals using data from a large US corporation. The results in this case show that appraisals are informative and directly influence many dimensions of employee outcomes, including employee bonuses, merit pay, employee promotions, and decisions to exit the firm. The evidence shows that the appraisal process here is consistent with a relational, open-ended view of employment. It is not consistent with the common economic view that performance appraisals simply settle-up contractually based employment relationships. [ABSTRACT FROM AUTHOR]

We analyze the effects of regulatory interference in compensation contracts, focusing on recent mandatory deferral and clawback requirements restricting incentive compensation of material risk‐takers in the financial sector. Moderate deferral requirements have a robustly positive effect on risk‐management effort only if the bank manager's outside option is sufficiently high; otherwise, their effectiveness depends on the dynamics of information arrival. Stringent deferral requirements unambiguously backfire. Our normative analysis characterizes whether and how deferral and clawback requirements should supplement capital regulation as part of the optimal policy mix. [ABSTRACT FROM AUTHOR]

Copyright of Proceedings of the Faculty of Economics in East Sarajevo / Zbornik Radova Ekonomskog Fakulteta u Istočnom Sarajevu is the property of University of East Sarajevo and its content may not be copied or emailed to multiple sites or posted to a listserv without the copyright holder's express written permission. However, users may print, download, or email articles for individual use. This abstract may be abridged. No warranty is given about the accuracy of the copy. Users should refer to the original published version of the material for the full abstract. (Copyright applies to all Abstracts.)

We examine how executives' ability to control their firms' exposure to risk affects the design of their incentive-compensation contracts. Our natural experimental evidence shows that exchange-traded weather derivatives allow executives to control their firms' exposure to weather risk. Once these derivatives became available, those executives who use them to hedge experience relative reductions in their total compensation and equity incentives. The decline in compensation is consistent with a reduction in the risk premium that executives receive for exposure to weather risk. The decline in equity incentives is consistent with the relation between risk and incentives shifting in a complementary direction when executives can better control their firms' exposure to risk. Collectively, our findings provide evidence that executives' ability to control their firms' exposure and, by extension, their own to an important source of risk influences the design of their incentive-compensation contracts. JEL Classifications: G32; J33; J41. [ABSTRACT FROM AUTHOR]

This paper provides evidence on a large-scale teacher incentive program in the state of São Paulo, Brazil, which awarded group bonuses to teachers and school staff conditional on improvements in student performance. By using a difference-in-differences and triple-differences framework with a series of alternative counterfactual groups, I show that the program had positive effects on student achievement up to seven years after implementation, although improvements vary across grades and subjects. Although it could be expected that free-riding effects increase with the number of teachers in schools, limiting the impact of the program, this does not seem to be the case. [ABSTRACT FROM AUTHOR]

The following teaching brief outlines ways for advertising and public relations educators to discuss gender pay equity in the classroom. We know that educators are asked to teach about matters of diversity; yet many faculty members do not have adequate resources to do so. Faculty can rely on data and reports, but there are few hands-on activities that allow students to directly wrestle with gender pay disparity. The following activity centers on a hypothetical scenario in which we ask students to allocate pay bonuses to employees based on performance, time on the job, and other work-related factors. Over multiple semesters, we found that students consistently award smaller percentages of the bonus pool to employees with names commonly associated with females. Thus, this exercise provides a helpful way to enlighten students about implicit bias and gender pay equity in the professions of advertising and public relations. [ABSTRACT FROM AUTHOR]

Many business leaders have the tendency to vigorously pursue rapid firm growth, but this focus is often criticized as problematic in terms of operating performance. Accordingly, this study suggested that the asset growth anomaly is an inevitable phenomenon for growing restaurant firms: operating profitability increases as assets grow to the optimum level and then decreases after this level. However, most restaurant firms invest their capital below the optimum level, and only a small number of restaurant firms increase their assets too rapidly. Further, the amount of a chief executive officer's (CEO's) bonus payments motivates their investments in asset growth, while the amount of stock options increases the probability of overinvestment practices in restaurant firms. Therefore, even though overinvestment practices are not apparent in most restaurant firms, an appropriate proportion of equity-based incentives is beneficial to prevent overinvestment practices by a few restaurant firms to avoid negatively impacting shareholders' wealth. [ABSTRACT FROM AUTHOR]

Globally, textile and clothing companies are seeking to increase the export rate by minimising the cost of production. The same goal still applies for Tunisian companies. Nonetheless, production cost is the most but not the only significant factor that increases the competitiveness of a product. Others are important in beating the challenge of global competition. Among these factors are deadlines, economic and social stability, proximity, competence of the workforce and quality. In this study, the SAW method was used to develop a method for the calculation of a salary bonus according to the following criteria: the quality index, performance, difficulty of work, discipline, and attendance. This method improved the skills and wages of the workforce, decreased the absenteeism rate and increased the productivity of the company. The results showed in dependence on the case studied that the quality index varied between -0.053 and 1, performance between 40.5 and 81, the ranking vector between 0.545 and 0.911, and the bonus rate between 0% and 15%. The study reduced the absenteeism rate from 13.25% to 8.3% for direct labour. The quality of production was improved by reducing the defect rate by 8.54% to 4.6%. The efficiency of the chain was also improved by 51% to 67.3%. [ABSTRACT FROM AUTHOR]

In family firms, where the family and the business domains are intertwined, conflicts from one domain can spill over to the other. Agency conflicts in the business domain can spread to the family domain and ruin the well-being of the families. Agency theorists suggest that corporate governance tools such as performance-based incentive pay and dividend payouts can be used to mitigate agency conflicts in widely-held firms. Previous studies in family firms, however, show inconclusive results. This paper aims to investigate whether incentive pay and dividend payouts alleviate agency conflicts in family firms, from an auditor's perspective. Audit research shows that audit fees are higher for firms (auditees) with more severe agency problems. Thus, an audit fee premium (discount) can be a proxy for the severity (mildness) of agency conflicts. If a governance tool exacerbates (mitigates) agency conflicts in a family firm, it is expected to lead to an audit fee premium (discount). Using data from 150 largest listed companies in Hong Kong, the analyses show that the impacts of incentive pay and dividend payouts on audit fees are not uniform. Auditors view the governance tools as effective in mitigating agency conflicts only in some settings. This implies that the owning families should be cautious when implementing a governance tool. In some situations, a governance tool may aggravate agency conflicts in the business domain, which then can spill over to the family domain and adversely affect the family welfare. [ABSTRACT FROM AUTHOR]

Using a large hand-collected database of chief executive officer (CEO) bonus structures, we find that when a CEO’s bonus is directly tied to earnings per share (EPS), his company is more likely to conduct a buyback. This effect is especially pronounced when a company’s EPS is right below the threshold for a bonus award. Share repurchasing increases the probability the CEO receives a bonus and the magnitude of that bonus, but only when bonus pay is EPS based. Bonus-driven repurchasing firms do not exhibit positive long-run abnormal returns. [ABSTRACT FROM PUBLISHER]

In this discussion of Bol, Hecht and Smith (this issue; BHS), I examine their theory and experimental setting with the purposes of investigating how their study generalizes and identifying further research possibilities. First, I discuss the uncontrollable events the study addresses, which are influenceable and require innovative effort to prevent adverse effects. What follows next is an analysis of experimental design choices and their implications. In particular, results could be specific to the manipulation of event likelihood, as well as to the properties of the objective bonus system and form of subjectivity. This illustrates how evaluation system design properties can create diverse reference points and affect perceived fairness and discretionary adjustments. Together, these points indicate wherein the contribution of BHS lies, and provide an outline for future research opportunities by suggesting alternative research choices. [ABSTRACT FROM AUTHOR]

Discretionary bonus adjustments allow managers to restore the alignment of employee effort and compensation when bonus amounts are based on noisy objective performance measures. The implications of discretionary adjustments for employees' future efforts and fairness perceptions present important trade-offs for managers to consider. Adjustments may be used to motivate different types of effort in future periods, but may also create perceptions of unfairness among employees who are not affected by negative events. This study examines the joint influence of the likelihood of future negative uncontrollable events and compensation interdependence (i.e., the extent to which one employee's compensation influences others' compensation) on managers' willingness to make adjustments for the effect of a negative uncontrollable event on a single employee. In our experiment, we manipulate the likelihood of future uncontrollable events and whether bonuses are determined individually or are drawn from a shared bonus pool. Results show that managers are less willing to adjust when the likelihood of future events is high to avoid setting a precedent, thereby motivating employees to adapt to changing conditions. We also find that managers are less willing to adjust, regardless of event likelihood, when compensation interdependence is high, to avoid demotivating unaffected employees. Finally, we find that participants' general attitudes toward compensation significantly influence their adjustment decisions beyond the effects of our independent variables. Our results highlight the unique nature of discretionary adjustments, help explain findings from previous research, and demonstrate important considerations managers must make when using the flexibility provided to them in pay-for-performance contracts. [ABSTRACT FROM AUTHOR]

We study the effect of shared political identity between acquirers and targets on merger outcomes. In a sample of public US mergers, we find that targets are more likely to merge with firms of similar political orientation. We document that acquirers in politically matched mergers experience significantly worse cumulative abnormal returns around the merger announcement, compared to their non‐politically matched counterparts. Acquirers in those mergers pay lower takeover premiums, experience worse post‐merger operating performance, retain more from the target management, and receive larger bonuses. Our results indicate that politically matched mergers create less value to shareholders. [ABSTRACT FROM AUTHOR]

We examine two ways through which student financial aid can be reformed: a cut in the rate at which the aid is clawed back with earned income or an increase in the threshold at which this clawback applies. We present a theoretical and empirical analysis of these options. We show that both reduce incentives to work, although the clawback rate does so less. Cuts to clawbacks also deliver a bigger boost to financial aid for those most in need, although they may benefit students higher in the income distribution. We argue that governments might consider a policy that reduces clawback rates, but within a reasonable range of earned income. [ABSTRACT FROM AUTHOR]

Our novel game-theoretic Principal/Two-Agent model ensures that the Principal has a reliable internal signal about the Agents' invested work and effort. Analysing the dominant strategies deductively proves that suboptimal results cannot be prevented with focus on evaluation, implying that quality of work, not its evaluation, must be considered as the most important outcome of the process. The objective of the paper is to establish a new game theoretic model that can be used as a tool for policy makers and managers to motivate Agents and ensure high quality results. Additionally, the model can be used to determine the awards in a company bonus system. The newly developed model is an extended Principal-Agent model with an internal game between two Agents, whose payoff structure can be set in order to ensure truthful implementation of the internal signal to the Principal. By analysing the dominant strategies, we determined the conditions that ensure each Nash equilibrium of the game to manifest the desired outcome. The model presents a novel approach to alignment of interests, for example, in economy, social problems (e.g. policy making for educational process), management, project management, and the mentor-apprentice relationship. [ABSTRACT FROM AUTHOR]

Copyright of FinanzRundschau is the property of De Gruyter and its content may not be copied or emailed to multiple sites or posted to a listserv without the copyright holder's express written permission. However, users may print, download, or email articles for individual use. This abstract may be abridged. No warranty is given about the accuracy of the copy. Users should refer to the original published version of the material for the full abstract. (Copyright applies to all Abstracts.)

Using a simple game-theoretical model of contests, we compare the effort exerted by rugby teams under three different point systems used in tournaments around the world. We consider a point system that awards four points to the winning team, no points to the losing team, and two points to each team in a case of a draw. The other two point systems award bonus points depending on the final score. They both award a bonus point for losing by only one try. One of these two systems gives an extra point to the team that scores four or more tries while the other gives it for scoring three more tries than the other team. We develop two models. One is a static one, intended to compare the joint efforts equilibria as to find which point system maximizes the effort exerted by the teams. The other is a dynamical model, providing a framework for the analysis of equilibrium payoffs and find the one in which teams exert more joint effort. In both models, the point system that maximizes the amount of effort in rugby is the one that awards a bonus point for scoring three more tries than the opponent. To evaluate the real-world validity of this claim we run empirical analyses using data from matches under the three point systems being evaluated. The empirical results confirm our theoretical conclusions. [ABSTRACT FROM AUTHOR]

I solve in closed form for the optimal dynamic risk choice of a fund manager who is compensated with a high-water mark contract. The optimal risk choice depends on the ratio of the fund's assets under management to its high-water mark. If the manager's outside option value is low, investors' termination policy is strict, or management fees are high, then negative returns induce the manager into “derisking.” Otherwise, he engages in “gambling.” Having the option to walk away increases risk taking, though in many cases exercise is never optimal. In particular, leaving to restart at a proportionally smaller fund is always suboptimal. [ABSTRACT FROM PUBLISHER]

The article reminisces about the marketing strategy of offering "bonus prizes" such as genuine American Indian artifacts, particularly ancient flaked stone arrowheads or katsina-like dolls, in promotions like the Doubleday Publishing Company's "Living History Program" in the 1960s. The author, reflecting on his childhood experience, recalls choosing an arrowhead as his "bonus prize," highlighting the era's unique sales incentives and the lasting impact on personal collections.

Decision Support System is a computerized system designed to increase effectiveness in decision making to solve semi-structured and unstructured problems so that the decision-making process can be of higher quality. One method of solving MADM problems is by using the Simple Additive Weighting method. The SAW method is to find the weighted sum of the performance ratings for each alternative of all attributes. This study aims to design and create a system to determine which employees are entitled to receive bonuses, for that we need a decision support for giving employee bonuses decisions. In this study using the Simple Additive Weighting method. The system development model used is a waterfall. Waterfall has several stages, namely needs analysis, system design, writing program code, program testing, program implementation and maintenance. The results showed the benefits of the SAW method as a decision support system for determining employee bonuses based on the employee performance of PT. Mayatama Solusindo can assist administrators in determining employee bonuses quickly and effectively. So the bonus that employees get using the SAW method is the basic salary times the percentage of the ranking value.

Any firm choosing a CEO faces a double problem: candidate selection and choice of a compensation scheme. We derive sufficient conditions where the unique optimal compensation scheme is a capped-bonus contract in a pure moral-hazard environment, while equity is used when the firm also faces adverse-selection. Then, we provide a rationale for the simultaneous increases in CEO pay, use of equity in compensation and external hiring of CEOs.Our results are consistent with empirical evidence that shows externally hired CEOs earn more than those internally hired and that externally hired CEOs get a higher fraction of their compensation equity based. [ABSTRACT FROM PUBLISHER]

Quota-based bonuses and commissions are the two most common incentive compensation plans. The authors uncover differential effects of these plans from a natural field-based experiment featuring 14,000 monthly observations over three years from 458 sales territories of a pharmaceutical firm that switched from a bonus plan to an equivalent commission plan. The intervention led to significant sales productivity improvement; this effect was heterogeneous across ability deciles, with much larger increases occurring at lower ability deciles. The authors find significant differences across these plans on (1) effort against nonincentivized tasks and (2) output fluctuations induced through 'timing games.' At this firm, the bonus plan was strictly inferior to the implemented commission plan with respect to short-term revenues and timing games. In contrast, the commission plan induced greater neglect of nonincentivized tasks (tasks not directly affecting observable output). To organize their findings, the authors build a simple theoretical model in the personnel economics tradition. The novel result that multitasking concerns are reduced under bonus plans when the quota has been met provides a nuanced rationale for the widespread existence of lump-sum bonus plans. [ABSTRACT FROM AUTHOR]

Using administrative payroll data from the largest US payroll processing company, we measure the extent of nominal wage rigidity in the United States. The data allow us to define a worker's per-period base contract wage separately from other forms of compensation such as overtime premiums and bonuses. We provide evidence that firms use base wages to cyclically adjust the marginal cost of their workers. Nominal base wage declines are much rarer than previously thought with only 2 percent of job-stayers receiving a nominal base wage cut during a given year. Approximately 35 percent of workers receive no base wage change year over year. We document strong evidence of both time and state dependence in nominal base wage adjustments. In addition, we provide evidence that the flexibility of new hire base wages is similar to that of existing workers. Collectively, our results can be used to discipline models of nominal wage rigidity. (JEL E24, E32, J31, J41) [ABSTRACT FROM AUTHOR]