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

Alexander Pepper and Julie Gore

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

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)
JEL-codes: D0 J32 (search for similar items in EconPapers)
Date: 2014-07
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Citations: View citations in EconPapers (7)

Published in Journal of World Business, July, 2014, 49(3), pp. 350-361. ISSN: 1090-9516

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