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

Pepper, Alexander and Gore, Julie (2014) The economic psychology of incentives: an international study of top managers. Journal of World Business, 49 (3). pp. 350-361. ISSN 1090-9516

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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.

Item Type: Article
Official URL: http://www.journals.elsevier.com/journal-of-world-...
Additional Information: © 2014 Elsevier
Library of Congress subject classification: H Social Sciences > HB Economic Theory
H Social Sciences > HD Industries. Land use. Labor
Journal of Economic Literature Classification System: D - Microeconomics > D0 - General
J - Labor and Demographic Economics > J3 - Wages, Compensation, and Labor Costs > J32 - Nonwage Labor Costs and Benefits; Private Pensions
Sets: Departments > Management
Collections > Economists Online
Research centres and groups > Employment Relations and Organisational Behaviour Group
Rights: http://www.lse.ac.uk/library/usingTheLibrary/academicSupport/OA/depositYourResearch.aspx
Date Deposited: 12 Aug 2013 14:56
URL: http://eprints.lse.ac.uk/51655/

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