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Article: Performance Thresholds in Managerial Incentive Contracts

TitlePerformance Thresholds in Managerial Incentive Contracts
Authors
KeywordsBusiness and economics
Issue Date2003
PublisherUniversity of Chicago Press. The Journal's web site is located at http://www.journals.uchicago.edu/JB
Citation
Journal Of Business, 2003, v. 76 n. 4, p. 665-696 How to Cite?
AbstractPerformance thresholds are commonly used in executive compensation contracts. We examine the contractual nonlinearity associated with performance thresholds and its incentive implications. Incorporating a performance threshold into a standard principal-agent model of a linear contract, we show that pay schemes using a performance threshold are optimal. By truncating a linear scheme at poor performance, the threshold mitigates agency costs associated with the downside risk of production. Examining CEO compensation data, we find evidence of the role of performance thresholds. As a consequence of under-threshold performance, the tobit estimator is shown to increase pay-performance sensitivity, notably improving upon the standard OLS estimator.
Persistent Identifierhttp://hdl.handle.net/10722/43532
ISSN
2007 Impact Factor: 1.133
2009 SCImago Journal Rankings: 3.065
ISI Accession Number ID
References

 

DC FieldValueLanguage
dc.contributor.authorZhou, Xen_HK
dc.contributor.authorSwan, PLen_HK
dc.date.accessioned2007-03-23T04:48:10Z-
dc.date.available2007-03-23T04:48:10Z-
dc.date.issued2003en_HK
dc.identifier.citationJournal Of Business, 2003, v. 76 n. 4, p. 665-696en_HK
dc.identifier.issn0021-9398en_HK
dc.identifier.urihttp://hdl.handle.net/10722/43532-
dc.description.abstractPerformance thresholds are commonly used in executive compensation contracts. We examine the contractual nonlinearity associated with performance thresholds and its incentive implications. Incorporating a performance threshold into a standard principal-agent model of a linear contract, we show that pay schemes using a performance threshold are optimal. By truncating a linear scheme at poor performance, the threshold mitigates agency costs associated with the downside risk of production. Examining CEO compensation data, we find evidence of the role of performance thresholds. As a consequence of under-threshold performance, the tobit estimator is shown to increase pay-performance sensitivity, notably improving upon the standard OLS estimator.en_HK
dc.format.extent168863 bytes-
dc.format.extent25088 bytes-
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dc.format.mimetypeapplication/pdf-
dc.format.mimetypeapplication/msword-
dc.format.mimetypeapplication/pdf-
dc.languageengen_HK
dc.publisherUniversity of Chicago Press. The Journal's web site is located at http://www.journals.uchicago.edu/JBen_HK
dc.relation.ispartofJournal of Businessen_HK
dc.rightsCreative Commons: Attribution 3.0 Hong Kong License-
dc.rightsThe Journal of Business (Chicago). Copyright © University of Chicago Press.en_HK
dc.subjectBusiness and economicsen_HK
dc.titlePerformance Thresholds in Managerial Incentive Contractsen_HK
dc.typeArticleen_HK
dc.identifier.openurlhttp://library.hku.hk:4550/resserv?sid=HKU:IR&issn=0021-9398&volume=76&issue=4&spage=665&epage=696&date=2003&atitle=Performance+Thresholds+in+Managerial+Incentive+Contractsen_HK
dc.identifier.emailZhou, X: xianzhou@hkucc.hku.hken_HK
dc.identifier.authorityZhou, X=rp01129en_HK
dc.description.naturepublished_or_final_versionen_HK
dc.identifier.doi10.1086/377035en_HK
dc.identifier.scopuseid_2-s2.0-0346308242en_HK
dc.identifier.hkuros103595-
dc.relation.referenceshttp://www.scopus.com/mlt/select.url?eid=2-s2.0-0346308242&selection=ref&src=s&origin=recordpageen_HK
dc.identifier.volume76en_HK
dc.identifier.issue4en_HK
dc.identifier.spage665en_HK
dc.identifier.epage696en_HK
dc.identifier.isiWOS:000186479700007-
dc.publisher.placeUnited Statesen_HK
dc.identifier.scopusauthoridZhou, X=8217375200en_HK
dc.identifier.scopusauthoridSwan, PL=35838848000en_HK

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