Management Team Incentive: Dispersion and Firm Performance ——by Robert M. Bushman Zhonglan Dai Weining Zhang Reporter: Zehui Hong (16720823)

Structure ·Research Significance ·Research Content ·Basic Information ·Research Significance ·Research Content ·Related Theories and Hypotheses ·Research Design ·Empirical Analysis ·Research Results ·Personal Review

1 Basic Information Journal Authors The Accounting Review,2016(1):21-45 Robert M. Bushman The University of North Carolina at Chapel Hill Authors Zhonglan Dai The University of Texas at Dallas Weining Zhang Cheung Kong Graduate School of Business

2 Research Significance This paper extends the literature by using a measure of dispersion in PPS levels across top executives as a proxy for the incentive design component shaped by an executive team’s synergy profile.

3 Research Content Recent theory suggests that firms incorporate synergistic interrelationships among executives into optimal incentive design. This article focus on Pay Performance Sensitivities(PPS) and use dispersion in PPS Recent theory suggests that firms incorporate synergistic interrelationships among executives into optimal incentive design. It models optimal PPS dispersion and use residuals from this model to measure deviations from optimal.

Social comparison theory 4 Related Theories and Hypotheses Tournament theory Social comparison theory CEO power theory Agency theory

4 Related Theories and Hypotheses Incentive design is a process where value-maximizing firms seek to eliminate deviations from optimality and restore optimal dispersion levels but are constrained by adjustment costs. Closer team relationships and a deeper understanding of value-enhancing synergies within the team evolve over time so as to foster better cooperation, which, in turn, helps offset deleterious effects of deviations from optimal (less negative) PPS dispersion. Higher R&D intensity and more geographic diversification is indicative of the importance of achieving team coordination and will be associated with a greater negative impact of deviations from optimal dispersion on firm performance.

5 Research Design Data Research Design Variables Definition Model

5.1 Data The compensation data are from the Compustat ExecuComp database, and span the years 1992–2013. ①Firm financial information from Compustat and stock return data from CRSP. ②Delete firm-years when the number of top-paid executives is less than five and keep only the top five highest-paid executives. ③All results are robust to using all executives instead of only the top five. After merging the data, the sample contains 17,735 firm-years, consisting of 3,966 CEOs and 22,496 other top-paid executives (termed as VPs) for 2,342 firms.

5.2 Variables Definition

5.2Variables Definition

5.3 Models (1)𝑇𝑜𝑏𝑖 𝑛 ′ 𝑠 𝑄 t / 𝑅𝑂𝐴 t =𝛼+ 𝛽𝑆𝑇𝐷_𝑃𝑃𝑆 t−1 + 𝛾𝑂𝑡ℎ𝑒𝑟 𝐶𝑜𝑚𝑝𝑒𝑛𝑠𝑎𝑡𝑖𝑜𝑛 𝐶𝑜𝑛𝑡𝑟𝑜𝑙𝑠 𝑡−1 + 𝜆𝐹𝑖𝑟𝑚 𝐶𝑜𝑛𝑡𝑟𝑜𝑙𝑠 𝑡−1 +𝐼𝑛𝑑𝑢𝑠𝑡𝑟𝑦 𝑎𝑛𝑑 𝑌𝑒𝑎𝑟 𝐹𝑖𝑥𝑒𝑑 𝐸𝑓𝑓𝑒𝑐𝑡𝑠+ 𝜀 𝑡 (2)𝑆𝑇𝐷_𝑃𝑃𝑆 t−1 =𝛼+ 𝜆∗𝐹𝑖𝑟𝑚/𝐼𝑛𝑑𝑢𝑠𝑡𝑟𝑦_𝐿evel𝐷𝑒𝑡𝑒𝑟𝑚𝑖𝑛𝑎𝑛𝑡𝑠 𝑡−1 +𝐹𝑖𝑟𝑚 𝐹𝑖𝑥𝑒𝑑 𝐸𝑓𝑓𝑒𝑐𝑡 +𝑌𝑒𝑎𝑟 𝐹𝑖𝑥𝑒𝑑 𝐸𝑓𝑓𝑒𝑐𝑡𝑠+𝜀 (3)𝑆𝑇𝐷_𝑃𝑃𝑆 𝑡 − 𝑆𝑇𝐷_𝑃𝑃𝑆 𝑡−1 =𝛼+𝛿∗（ 𝑇𝑎𝑟𝑔𝑒𝑡 𝑡 − 𝑆𝑇𝐷_𝑃𝑃𝑆 𝑡−1 ）+ 𝜀 𝑡 𝑆𝑇𝐷_𝑃𝑃𝑆 𝑡 =𝛼+(1−𝛿)*STD_ 𝑃𝑃𝑆 𝑡−1 +𝛿∗ 𝑇𝑎𝑟𝑔𝑒𝑡 𝑡 + 𝜀 𝑡 Where 𝑇𝑎𝑟𝑔𝑒𝑡 𝑡 =𝛼+(1−𝛿)* 𝑆𝑇𝐷_𝑃𝑃𝑆 t−1 +𝛿∗ 𝑇𝑎𝑟𝑔𝑒𝑡 𝑡 + 𝜀 𝑡

6 Empirical Analysis Part 1 Part 2 Part 3 OLS Regression Analysis Deviations from Optimal PPS Dispersion and Firm Performance PPS Dispersion Adjustment Process Part 3

6.1 OLS Regression

6.2 Deviations from Optimal PPS Dispersion and Firm Performance

6.2 Deviations from Optimal PPS Dispersion and Firm Performance

6.3 PPS Dispersion Adjustment Process

6.3 PPS Dispersion Adjustment Process

7 Research Results Results (i) Firm performance is increasing (decreasing) in the residual when PPS dispersion is too low(too high), after controlling for the PPS levels of each individual executive separately. (ii) The vectors of subsequent equity grant PPS are more positively (negatively) correlated with the vector of executives’ current PPS in order to increase (decrease) PPS dispersion for firms below (above). (iii) Deviations from optimal PPS dispersion become less damaging to firm performance as the duration of a team’s tenure together increases. (iv)Higher R&D intensity and larger geographic segment dispersion significantly exacerbate under-performance associated with deviations from optimal PPS dispersion, consistent with the importance of cooperation and coordination for these types of firms. Results

8 Personal Review Recent theory suggests that firms incorporate synergistic interrelationships among executives into optimal incentive design. In this paper the authors focus on PPS and extend the literature by using a measure of PPS dispersion across top executives as a proxy for the incentive design component shaped by an executive team’s synergy profile, which is a significant contribution. It provides evidence consistent with residuals from the PPS dispersion model actually reflecting deviations from optimal and establishes a basis for us to examine the dynamic adjustment process of PPS dispersion toward optimality over time.

Thank you!