ERIM Research Clinic: Managerial Incentives
Speaker
Abstract
| The financial and economic crisis has enhanced the attention in practice and academia in the effects that pay-for-performance systems may have on the risk inclination of decision makers in financial institutions. The more general behavioral accounting research question is how to design pay-for-performance systems to ensure that the behavior of managers under such systems is aligned with the rational analysis of the relationship between risk and return. One way to go about is to reward managers for the long-term consequences of their decisions, either by choosing other metrics, other evaluation periods, or by smoothening out bonus payments. An example of a concrete system is the so called 'bonus bank', which is a virtual bank to which bonuses are debited when they are earned and consolidated, and from which payments are made over time. Bonus banks work by smoothing out performance over time, thus correcting immediate profits with (potential) later losses. This smoothing effect is argued to reduce managers’ dysfunctional incentives to engage in transactions with good short-term prospects, at the cost of bad (long-term) outcomes. However bonus banks may not only have a positive effect, as they will also affect managerial effort levels and may even have adverse risk taking properties. In this lecture I will present the various ways in which the problem of managerial short-termism ('myopia') and dysfunctional risk taking can be understood from a behavioral accounting perspective. The presentation will be based on my current work in this area and will seek a match between research issue and empirical method. |
| Contact information: |
| Frank Hartmann |
