Melbourne Accounting Research Seminar - Professor Shane Dikolli
Melbourne Accounting Research Seminar
Deans Boardroom, level 12, The Spot
198 Berkeley St, Carlton
Gladys Lee and Like Jiang
Professor Shane Dikolli from the Darden School of Business, University of Virginia presented a MARS seminar.
Topic: Estimating Pay-for-Performance Sensitivity in the Presence of Relative Performance Evaluation
Abstract: We study how a compensation researcher’s empirical use of a net performance measure (i.e., after deducting compensation expense) instead of a gross performance measure (i.e., before deducting compensation, consistent with principal-agent theory) affects inferences regarding managerial effort incentives. We analytically demonstrate that as long as boards use relative performance evaluation, it is irrelevant whether managerial compensation is based on gross or net performance because a researcher can construct an unbiased estimate of managerial incentives from interpreting compensation regressions. However, we also show that the direct coefficient on a net performance measure in a compensation regression will, in theory, yield either an upward or downward bias in the estimate of managerial incentives. We provide empirical evidence of, on average, a downward bias, which also suggests a possible explanation for surprisingly weak CEO incentives interpreted in prior studies.