How to Tie Equity Compensation to Long-Term Results

Companies, investors, and regulators around the world are now seeking to tie executives' payoffs to long-term results and avoid rewarding executives for short-term gains. Focusing on equity-based compensation, the primary component of top executives' pay, the authors analyze how such compensation should best be structured to provide executives with incentives to focus on long-term value creation.
To improve the link between equity compensation and long-term results, the authors recommend that executives be prevented from unwinding their equity incentives for a significant time period after vesting. At the same time, however, the authors suggest that it would be counterproductive to require that executives hold their equity incentives until retirement, as some have proposed. Instead, the authors recommend that companies adopt a combination of "grant-based" and "aggregate" limitations on the unwinding of equity incentives.
Grant-based limitations would allow executives to unwind the equity incentives associated with a particular grant only gradually after vesting, according to a fixed, pre-specified schedule put in place at the time of the grant. Aggregate limitations on unwinding would prevent an executive from unloading more than a specified fraction of the executive's freely disposable equity incentives in any given year.
Finally, the authors emphasize the need for effective limitations on executives' use of hedging and derivative transactions that would weaken the connection between executive payoffs and long-term stock values that a well-designed equity arrangement should produce.     

A review of job embeddedness: Conceptual,measurement issues,and directions for future research

Job embeddedness (JE) theory is a relatively new perspective in turnover research. Although theoretical and empirical implications are encouraging, the construct of JE is still under development. In this paper, we identify five conceptualization and measurement issues warranting additional discussion and research. These are: (1) the composite measure vs. the global measure, (2) conceptual and measurement problems of community embeddedness, (3) conceptual and measurement problems associated with links, (4) discriminant validity issues and (5) the cultural boundaries of JE. For each issue, we discuss our concerns and suggest future research directions.     

Performance measurement systems and their relation to strategic learning: A case study in a software-developing organization

Authors have often suggested that expert systems for measuring and assessing intangible and tangible resources fulfill strategic learning purposes. This role requires further theoretical discussion and empirical investigation since strategic learning does not automatically result from the implementation of performance measurement systems (PMS). PMS can be used for internal or external control purposes in addition their development and usage can lead to strategic learning processes. Depending on how PMS are conceptualized they can be related to different modes of learning. Thus, this article links different types of PMS enactment with specific modes of learning. Strategic learning is thereby defined as specific mode within the organizational learning approach by Bateson (1972) and Argyris and Schön (1978). Orlikowski's work on technologies (2000) provides a framework for the different types of PMS enactment. A strategic learning process initiated by the development of PMS is illustrated through a case study in the software development industry.     

Organizational diversity programs across cultures: effects on absenteeism,turnover, performance and innovation

This study examined data from over 5000 organizations in 22 countries to address three complementary issues: (1) the influence of national culture on the adoption of diversity programs aimed at recruiting, training and promoting individuals from specific target groups; (2) the moderating effect of national cultural practices on the relationship between these diversity programs and the organizational outcomes of absenteeism and turnover; and (3) the mediating effect of absenteeism and turnover on the relationship between diversity programs and organizational performance and innovation. National cultural values and practices were taken from the GLOBE study and assigned respectively to the organizations in our sample. A multilevel path analysis supported the hypothesized effects of national cultural values on organizational diversity programs. Moreover, cultural practices were found to moderate the relationship between diversity programs and absenteeism and turnover. Our hypotheses on the role of absenteeism and turnover as mediators of the relationship between diversity programs and organizational performance and innovation were also supported. Our findings may help guide managers' decisions on the adoption of diversity programs in units operating in different national cultures. We discuss the implications of our findings for scholars and practitioners concerned with diversity management issues in a global context.     

Short-termism,shareholder payouts and investment in the EU

Investor-driven 'short-termism' is said to harm EU public firms' ability to invest for the long term, prompting calls for the EU to better insulate managers from shareholder pressure. But the evidence offered—rising levels of repurchases and dividends—is incomplete and misleading: it ignores large offsetting equity issuances that move capital from investors to EU firms. We show that, over the last 30 years and the last decade, net shareholder payouts have been moderate and investment and cash balances have increased. In sum, the data provide little basis for the view that short-termism in the EU warrants corporate governance reforms.     

Retention strategies that survive a sale

To keep key employees during rocky times, HR professionals strategically design high-powered compensation programs.     

Renegotiation of cash flow rights in the sale of VC-backed firms

Incomplete contracting theory suggests that venture capitalist (VC) cash flow rights, including liquidation preferences, could be subject to renegotiation. Using a hand-collected data set of sales of Silicon Valley firms, we find common shareholders do sometimes receive payment before VCs’ liquidation preferences are satisfied. However, such deviations from VCs' cash flow rights tend to be small. We also find that renegotiation is more likely when governance arrangements, including the firm's choice of corporate law, give common shareholders more power to impede the sale. Our study provides support for incomplete contracting theory, improves understanding of VC exits, and suggests that choice of corporate law matters in private firms.     

Assessing techno-economic alternatives for rural development in Northeast Mexico

In the arid zone of Northeast Mexico are located some of the most socially deprived and economically marginal communities in the nation. This paper analyzes the current status of their social and economic organization and suggests alternative techno-economic subsistence activities that could improve productive capacity while preserving the fragile ecological balance between communities and exploitable natural resources. It shows how recent advances in computer mapping, linear programming, and techno-social modelling (SOPA technique) can assist decision makers and planners in choosing the best mix of social, economic, and technical advantages from an array of scenarios of change. A major finding is that the use of cooperatives as a managerial format is not always the best one to utilize, given the variability of community cohesiveness and varying organizational requirements of different techniques of exploiting animal and plant resources.     

Pay Without Performance: Overview of the Issues

In their recent book, Pay Without Performance: The Unfulfilled Promise of Executive Compensation , the authors of this article provided a comprehensive critique of U.S. executive pay practices and the corporate governance processes that produce them, and then offered a number of proposals for improving both pay and governance. This article presents an overview of their analysis and proposals.
The authors' analysis suggests that the pay-setting process in U.S. public companies has strayed far from the economist's model of "arm's-length contracting" between executives and boards in a competitive labor market. In place of this conventional model, which is standard in corporate law as well as economics, the authors argue that managerial power and influence play a major role in shaping executive pay, and in ways that end up imposing significant costs on investors and the economy.
The main concern is not the levels of executive pay, but rather the distortion of incentives caused by compensation practices that fail to tie pay to performance and to limit executives' ability to sell their shares. Also troubling are "the correlation between power and pay, the systematic use of compensation practices that obscure the amount and performance insensitivity of pay, and the showering of gratuitous benefits on departing executives."
To address these problems, the authors propose three kinds of changes:

• 1)

  increases in transparency , accomplished in part by new SEC rules requiring annual corporate disclosure that provides "the dollar value of all forms of compensation" (including "stealth compensation" in the form of pensions and other post-retirement benefits) and an analysis of the relationship between the past year's pay and performance, as well as more timely and informative disclosure of insider stock purchases and sales;