Alleviating managerial dilemmas in human‐capital‐intensive firms through incentives: Evidence from M&A legal advisors

Research summary: We examine how human‐capital‐intensive firms deploy their human assets and how firm‐specific human capital interacts with incentives to influence this deployment. Our empirical context is the UK M&A legal market, where micro‐data enable us to observe the allocation of lawyers to M&A mandates under different incentive regimes. We find that law firms actively equalize the workload among their lawyers to seek efficiency gains, while “stretching” lawyers with high firm‐specific capital to a greater extent. However, lawyers with high firm‐specific capital also appear to influence the staffing process in their favor, leading to unbalanced allocations and less sharing of projects and clients. Paradoxically, law firms may adopt a seniority‐based rent‐sharing system that weakens individual incentives to mitigate the impact of incentive conflicts on resource deployment. Managerial summary: The study highlights the dilemmas when professional service firms allocate their key individuals to incoming projects, and the role that monetary incentives play in aggravating or alleviating these dilemmas. In the context of UK M&A law firms, we find that partners have a tendency to be attached to too many projects and not to share enough work, which is exacerbated when individual monetary incentives are stronger. Firms adopting a seniority based incentive system (lockstep system) are able to alleviate this effect. This implies that there is a trade‐off between rewarding personal performance versus balancing workloads and fostering collaboration among professionals. Copyright © 2015 John Wiley & Sons, Ltd.     

Incentive Redesign and Collaboration in Organizations: Evidence from a Natural Experiment

Research summary : Separating the individual from the social effects of incentives has been challenging because of the possibility of synergies in team production. We observe a unique natural experiment in a South Korean e‐commerce company in which a switch from pay‐for‐performance to fixed (but different) salaries took place in a staggered and effectively random manner across employees. In this case, social and individual effects perspectives make opposing predictions, enabling a critical test. We find evidence consistent with social effects of incentives, particularly as predicted by goal framing theory. The results have implications for the design of incentives to foster collaboration, organizational learning, and organizational performance. Managerial summary : Managers often neglect the deeper hypothesis behind pay‐for‐performance schemes—that people primarily care about how much they are individually paid. An opposing school of thought contends that incentives have social effects too—that individuals care about not only what they receive but also what their peers receive. It is difficult to say whether individual or social effects would be more salient in a context, without a proper experiment with randomization. We exploit a rare opportunity provided by a company that changed its incentive system in a random order, thus unintentionally creating a natural experiment. The results strongly validate the existence of social effects of incentives, but also make the general case for the opportunity to learn from experimenting with organization design in a systematic manner. Copyright © 2017 John Wiley & Sons, Ltd.     

The effect of U.K. incentives on R&D activities in U.S.-owned electronics companies in Scotland

The British Government provides numerous financial assistance programmes to assist electronics companies in funding investment projects, R&D activities, and applications of new technology. Interviews were conducted at fifteen U.S. electronics subsidiaries in Scotland to determine the effect of these government incentives in promoting technology and innovation. Results indicate that capital investment grants were widely used, but that financial aid schemes to encourage R&D and the adoption of advanced technology have no bearing on technical characteristics and decisions at the affiliates.     

Firm‐specific human capital,organizational incentives,and agency costs: Evidence from retail banking

This paper explores conflicting implications of firm‐specific human capital (FSHC) for firm performance. Existing theory predicts a productivity effect that can be enhanced with strong incentives. We propose an offsetting agency effect: FSHC may facilitate more‐sophisticated ‘gaming’ of incentives, to the detriment of firm performance. Using a unique dataset from a multiunit retail bank, we document both effects and estimate their net impact. Managers with superior FSHC are more productive in selling loans but are also more likely to manipulate loan terms to increase incentive payouts. We find that resulting profits are two percentage points lower for high‐FSHC managers. Finally, profit losses increase more rapidly for high‐FSHC managers, indicating adverse learning. Our results suggest that FSHC can create agency costs that outweigh its productive benefits. Copyright © 2013 John Wiley & Sons, Ltd.     

Near and dear? The role of location in CSR engagement

Research summary : Building on economic geography and institutional theory, we develop and test theory relating geographic variables to the strength of corporate social responsibility (CSR) engagement and the cost of equity capital. For a large sample of U.S. firms over the period 1998–2009, we find strong and robust evidence that firms located in areas characterized by high levels of local CSR density score higher in CSR engagement. In addition, firms located close to major cities and financial centers exhibit higher CSR engagement compared to firms located in more remote areas. Moreover, the effect of CSR engagement on reducing equity financing costs is even greater for firms in high CSR density areas than for firms in low CSR density areas. Managerial summary : Does the location of CSR engagement by firms affect the strength of CSR engagement by their neighbors? Does the geography of engagement have an impact on financial performance? Our findings show that a firm's CSR engagement increases in areas where there is dense CSR engagement and when it is located near large cities. In these areas, norms, values, and knowledge related to CSR are transmitted to firms through face‐to‐face meetings and frequent social interactions with groups such as peers, labor unions, news media, universities, and community organizations, which tend to be concentrated in large cities. Our findings further highlight that CSR engagement reduces equity financing costs for firms in areas where CSR is widely practiced. Copyright © 2015 John Wiley & Sons, Ltd.     

Telework quality and employee well-being: Lessons learned from the COVID-19 pandemic in Italy

The coronavirus disease 2019 (COVID-19) forced organisations to implement intensive telework for many of their workers overnight. This scenario was completely new, and the emergency caused by COVID-19 created the possibility of experimenting with new ways of working with an unknown impact on employee well-being. Drawing on previous literature, we defined a model of telework quality consisting of the following four core domains: agile offices within organisations, functional remote workstations, flex-time and engaging management. We identified two high-quality and low-quality telework profiles using latent profile analysis on a data sample of 2295 insurance and financial sector employees. Demographic, occupational and procedural characteristics were associated with the probability of being in the positive or negative profiles. Our results showed that employees' emotional exhaustion and work engagement levels were related to telework quality. This study suggests that organisations need to consider the quality of telework to effectively adopt new ways of working that foster employee well-being.     

Does a long‐term orientation create value? Evidence from a regression discontinuity

Research summary : In this paper, we theorize and empirically investigate how a long‐term orientation impacts firm value. To study this relationship, we exploit exogenous changes in executives' long‐term incentives. Specifically, we examine shareholder proposals on long‐term executive compensation that pass or fail by a small margin of votes. The passage of such “close call” proposals is akin to a random assignment of long‐term incentives and hence provides a clean causal estimate. We find that the adoption of such proposals leads to (1) an increase in firm value and operating performance—suggesting that a long‐term orientation is beneficial to companies—and (2) an increase in firms' investments in long‐term strategies such as innovation and stakeholder relationships. Overall, our results are consistent with a “time‐based” agency conflict between shareholders and managers. Managerial summary : This paper shows that corporate short‐termism is hampering business success. We show clear, causal evidence that imposing long‐term incentives on executives—in the form of long‐term executive compensation—improves business performance. Long‐term executive compensation includes restricted stocks, restricted stock options, and long‐term incentive plans. Firms that adopted shareholder resolutions on long‐term compensation experienced a significant increase in their stock price. This stock price increase foreshadowed an increase in operating profits that materialized after two years. We unpack the reasons for these improvements in performance, and find that firms that adopted these shareholder resolutions made more investments in R&D and stakeholder engagement, especially pertaining to employees and the natural environment. Copyright © 2016 John Wiley & Sons, Ltd.     

Pricing Schemes and Seller Fraud: Evidence from New York City Taxi Rides

Different pricing schemes gives sellers different financial incentives to defraud consumers. Using rich microdata on New York City taxi rides, we examine the differences in traveled distance, duration and fare between trips taken by non‐local passengers and those by comparable local passengers. We find that, for trips subject to a two‐part tariff, the discrepancies are larger when the variable rate is higher, or when the expected post‐dropoff occupancy is lower; furthermore, the impact of the post‐dropoff occupancy is more pronounced when the variable rate is higher. In contrast, trips subject to a flat fare scheme do not exhibit these patterns.     

Top management team incentive heterogeneity,strategic investment behavior,and performance: A contingency theory of incentive alignment

Research summary : We develop and test a contingency theory of the influence of top management team (TMT) performance‐contingent incentives on manager–shareholder interest alignment. Our results support our theory by showing that although TMTs engage in significantly higher levels of acquisition investment when their average incentive levels increase, investors' responses to those large investments are generally negative. More importantly, however, we further find that within‐TMT incentive heterogeneity conditions that effect, such that investors evaluate TMTs' large acquisition investments more positively as the variance in those top managers' incentive values increases. Thus, within‐TMT incentive heterogeneity appears to increase manager–shareholder interest alignment, in the context of large acquisition investments. Managerial summary : We find that as the average value of TMTs' incentives increase, relative to their total pay, they invest more in acquisitions and investors' respond negatively to the announcement of those deals. However, we further show that investors respond more positively to acquisitions announced by TMTs whose members' incentive values vary (some TMT members hold higher incentives and others hold lower). Results imply that when TMT members hold differing incentives levels, they approach investments from divergent perspectives, scrutinize those investments more heavily, and make better decisions, relative to TMTs with similar incentives. They also suggest that boards seeking tighter manager–shareholder interest alignment may benefit from introducing variance into TMT members' incentive structures, as doing so appears to create divergent preferences that can improve team decision making. Copyright © 2016 John Wiley & Sons, Ltd.     

The Financial Impact of Organisational Downsizing Practices—The New Zealand Experience

Partly in response to the Asian economic crisis, many organisations in the Asia Pacific rim reduced staff numbers. This research examines the New Zealand experience of this change intervention from 1997 to 1999. This includes an examination of the impact on financial performance, and how the process followed may moderate such an impact. A questionnaire instrument was designed to measure this, to which responses were received from 155 New Zealand for-profit organisations employing fifty or more people.There is some evidence to suggest that those respondents who had downsized over the period of the study reported lower measures of profitability than those who did not (p < .05). Also, ensuring the procedure was perceived as just by the employees, and offering outplacement help to those who lost their jobs, went some way to improving the financial performance of downsized firms (p < .05). This may suggest that if downsizing is necessary then attention needs to be given to how the process is implemented in order to maximise the financial return.Peter Carswell teaches, consults and researches in the areas of organisational change, development, and innovation; leadership; strategic management; team building; people management and human resource training; organisational culture; management development; and entrepreneurship. He is a research fellow at UNITEC Institute of Technology in New Zealand.     

The role of technical expertise in firm governance structure: evidence from chief financial officer contractual incentives

We provide evidence that the presence of technical expertise in firm governance structure reduces reliance on contractual incentives to control the potential agency problem for executives whose responsibilities require specialized knowledge. Specifically, we find that firms with financial expertise in the form of a board finance committee, or a chief executive officer with a financial background, tend to use lower levels of incentive‐based compensation for their chief financial officers. Our findings suggest financial experts provide stronger oversight and/or direction with regard to firm financial policies and strategies, thereby allowing firms to reduce reliance on incentive compensation. Our study provides insight into the role of technical expertise and board committees in firm governance, and into the benefits of common functional expertise within top management teams. Copyright © 2010 John Wiley & Sons, Ltd.     

A model of person‐pay interaction: how executives vary in their responses to compensation arrangements

A wealth of research indicates that both executive characteristics and incentive compensation affect organizational outcomes, but the literatures within these two domains have followed distinct, separate paths. Our paper provides a framework for integrating these two perspectives. We introduce a new model that specifies how executive characteristics and incentives operate in tandem to influence strategic decisions and firm performance. We then illustrate our model by portraying how executive characteristics interact with a specific type of pay instrument—stock options—to affect executive behaviors and organizational outcomes. Focusing on three individual‐level attributes (executive motives and drives, cognitive frame, and self‐confidence), we develop propositions detailing how executives will vary in their risk‐taking behaviors in response to stock options. We further argue that stock options will amplify the implications of executive ability, such that option‐heavy incentive schemes will increase the performance of talented executives but worsen the performance of low‐ability executives. Our framework and propositions are meant to provide a starting point for future theorizing and empirical testing of the interactive effects of executive characteristics and incentive compensation on strategic decisions and organizational performance. Copyright © 2010 John Wiley & Sons, Ltd.     

Creating incentives for innovation? The relationship between pay dispersion in R&D groups and firm innovation performance

Innovation is a critical organizational outcome for its potential to generate competitive advantage. While the contribution of knowledge workers to the generation of innovation is widely recognized, little is known about how organizational incentive mechanisms stimulate or inhibit these workers' behaviors that promote innovation. This study examines the relationship between pay dispersion in R&D groups and firm innovation using employee‐level compensation data in US high‐technology firms. The results show that (1) pay dispersion in R&D groups is negatively related to firm innovation and (2) this negative relationship is alleviated in firms with greater financial slack. This study contributes to the innovation literature by illuminating the implications of organizational incentive systems for successful innovation. Copyright © 2013 John Wiley & Sons, Ltd.     

Flexible Wage Contracts,Temporary Jobs,and Firm Performance: Evidence From Italian Firms

This study focuses on the effects of decentralized wage schemes and temporary forms of employment on firm performance. The effect of monetary incentives on workers' effort and firm performance is a central topic in economics. According to the principal‐agent paradigm, firms (the principal) have to link employees' remuneration schemes to any verifiable indicator of performance to avoid opportunistic behavior. The empirical evidence shows that financial incentives have the potential to exert strong effects on indicators of firm performance, such as productivity and worker absenteeism, although the degree of effectiveness of such schemes varies significantly according to the institutional/economic context in which firms operate. From both a theoretical and empirical point of view, the prediction on the effects of temporary types of employment on effort and productivity is less neat. In light of these considerations, this study uses a sample of Italian firms to provide further empirical evidence on whether and to what extent performance‐related pay schemes and contract flexibility affect workers' effort (in terms of absenteeism) and, in turn, firm productivity. These effects are analyzed for different types of workers (white collar vs. blue collar), working in workplaces characterized by a different degree of uncertainty and risk and in firms operating in different economic and institutional settings. Our results show that wage flexibility has a significant effect on effort and then on firm's productivity and that white‐collar workers are more responsive to monetary incentives than blue‐collar workers. Moreover, the presence of a large share of temporary contracts, implying a lower dismissal probability for permanent workers and a deterioration of the working environment, appears to reduce workers' motivation and effort.     

Are incentives without expertise sufficient? Evidence from fortune 500 firms

Agency theory predicts that incentives will align agents' interests with those of principals. However, the resource‐based view suggests that to be effective, the incentive to deliver must be paired with the ability to deliver. Using Fortune 500 boards as an empirical context, this study shows that the presence of directors who lack top‐level experience but own large shareholdings is negatively associated with firm value, an effect that increases in the number of such directors. Firm value rises after such directors depart from boards, with the greatest increases occurring when many of these directors leave. While agency theory highlights the importance of the right incentives being in place, this research suggests that this can be ineffective if the right resources are not also in place. Copyright © 2013 John Wiley & Sons, Ltd.     

Do source of mailing and monetary incentives matter in international industrial mail surveys?

To date there has been only a handful of studies on response rates of industrial mail surveys in the international setting. These studies have essentially dealt with either source of mailing effects or monetary incentives, and not a single study has dealt with both issues. Further, the results have been equivocal. In an attempt to resolve these equivocal findings, the authors report the results of a study wherein the impact of source of mailing effects and two types of monetary incentives on industrial mail survey response rates were investigated. Specifically, the hypotheses that a monetary incentive is better than a mailing effects incentive, a prize giveaway is better than a dollar incentive, and joint effects is better than only domestic mailing effects in enhancing response rates, were tested. Six hundred randomly selected Indian companies were systematically assigned to one of four groups, with a mailing size of 150 for each group. The four groups were the dollar incentive group, the prize giveaway group, the joint effects group, and a control group. The results indicate that the prize giveaway type of monetary incentive yielded a response rate of 25% that was significantly higher than the 7% of either the joint effects or the control group. Considering that prize giveaway had the least cost per response, it clearly appears superior to the other two tactics in enhancing response rates. More importantly, because joint effects fared no better than the control group in terms of response rates, it is difficult not to conclude that any attempt to sensitize respondents to a joint, domestic and foreign, affiliation in the context of research sponsorship would likely be a wasted effort.     

CEO incentives,innovation, and performance in technology‐intensive firms: a reconciliation of outcome and behavior‐based incentive schemes

Building on the agency view of corporate governance, we propose that technology‐intensive firms use both outcome and behavior‐based performance criteria for rewarding CEOs. Using a sample of 206 firms from 12 U.S. manufacturing industries, we find that as technological intensity increases CEO bonuses are more closely linked to financial results and that total CEO incentives are associated with two indicators of desirable innovation behaviors: invention resonance and science harvesting. Invention resonance refers to the impact a firm's inventions have on other firms' inventions, while science harvesting reflects a firm's commitment to scientific research. As technological intensity increases, aligning bonus with financial results, total incentives with invention resonance, and total incentives with science harvesting predict firm market performance. Copyright © 2006 John Wiley & Sons, Ltd.     

Occupational roles and expectations of research scientists and research managers in scientific research institutions†

Publicly funded research institutes in most countries have been pressed by economic and political pressures through the 1990s to become more financially independent, to be more accountable and to adopt more businesslike principles and practices. In this context the occupational roles and career options for scientists and research managers in these organisations have undergone considerable change. As the research cultures of these institutions take on a more commercial perspective, new and critical career path choices for both researchers and the organisations themselves have emerged. This article focuses on the changing occupational roles of research scientists and research managers in the Australian CSIRO (Commonwealth Scientific and Industrial Research Organisation), one of the world's largest multidisciplinary research organisations. Two critical occupational pathways are discussed: one between science and science management and another between science management and commercial management. Key points where the pathways diverge are identified and linked to broader issues of organisational culture and human resource management. The authors argue that research institutes such as the Australian CSIRO require a ‘multicultural’ management approach that horizontally integrates the industrial, scientific and commercial domains of the organisations’ research cultures.     

Value creation and value capture under moral hazard: Exploring the micro‐foundations of buyer– supplier relationships

We combine the formalism of a principal–agent framework with a value‐based analysis in order to investigate the micro‐foundations of business partner selection and the division of value in contracting relationships. In particular, we study how the key contracting parameters such as efficiency, transactional integrity, incentive alignment, and gaming affect outcomes when buyers face competing suppliers. We show that integrity and efficiency increase value creation and capture for all parties and are complements. While incentive gaming is unambiguously bad for value creation, and reduces buyers' value capture, it can benefit some suppliers. For alignment, we find that neither party has an incentive to use fully aligned performance measures that maximize total value creation. We conclude by analyzing buyers' and suppliers' incentives to invest in integrity. Copyright © 2014 John Wiley & Sons, Ltd.