Performance Measurement

Economic shocks affect how a CEO is evaluated

Between May and December 2008, Western Digital, one of the largest computer hard disk manufacturers in the world, experienced a severe shock*. Its stock price fell from $37.53 to $11.45. In 2009, the company reported in its proxy statement that it used discretion, as opposed to objective performance metrics, for evaluating its CEO. In 2008, it had not used […]

Pay for performance risks discouraging motivated employees

Incentive schemes, which rely on monitoring technologies, are becoming increasing popular as a means to foster productivity in public sector organisations. A legitimate question to ask is whether they improve service delivery or, instead, they force already motivated workers to waste time dealing with monitoring/reporting systems.

Two examples help us understand the kind of situations we have in mind. First […]

What gets measured gets distorted

Real Leadership

Something strange is happening to leadership at work. The old truths don’t seem to work anymore. Today’s leaders are not really sure which way to go. It used to be seen that every ‘leader’ needed ‘followers’, a hierarchy where people saw their future in the organisation and compliance was the order of the day. When insecurity crept in, […]

How should private equity firms compensate their CEOs?

The connection between executive compensation schemes and performance was brought into sharp focus again in November 2015 after Deutsche Bank’s co-Chief Executive John Cryan stated that bonuses do not encourage banking executives to work harder. He specified that bankers shouldn’t be rewarded as entrepreneurs, highlighting the underlying belief that bonuses may not drive the behaviours they are intended to […]

CEO pay packages are based on old, out-of-date assumptions

According to the popular French economist Thomas Piketty, one of the main factors contributing to the growing inequality in the western world is inflated rates of executive pay.

Whilst executive pay is frequently the subject of furious political and ethical debate, it too remains a difficult topic for the organisations employing top managers. Despite the fact that it would certainly […]

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    CEO pay should factor in market risk, regardless of its effect on their performance

CEO pay should factor in market risk, regardless of its effect on their performance

Writing effective managerial contracts is far from easy. Compensation committees must allocate incentives where they are most needed, while simultaneously being careful not to induce behaviours that would be detrimental to shareholders or imposing an inordinate amount of risk on managers. In a recent paper, I specifically focus on this second problem, that of reducing the risk borne by […]

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    Evidence suggests that firms set targets to avoid small losses

Evidence suggests that firms set targets to avoid small losses

The first picture shows the distribution of actual earnings in our study on target setting (see the study in brief box below) and replicates a well-established finding that reported earnings exhibit a ‘discontinuity at zero’ (meaning that there are disproportionally fewer firms with small losses compared to small profits), which one might surmise perhaps suggests that firms ‘manage’ earnings […]

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    With manager performance metrics, the tricky question is how to reward long-term thinking

With manager performance metrics, the tricky question is how to reward long-term thinking

Some time ago I was asked to comment on a study that found that the use of accounting return measures and non-financial measures in bonus plans was associated with managers’ long-term focus. This suggests that proper performance measurement systems can affect managers’ horizon and alleviate myopia.
Myopia is indeed a pervasive issue in business, as the Kay Review suggests (amongst countless others). The blame is often squarely […]

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    Managers with a history of good results get more flexible performance targets

Managers with a history of good results get more flexible performance targets

Here is one diehard maxim of business: don’t overshoot your performance target this year, because before you know it the one for next year will be tougher yet. This is target ratcheting at work: when you do better than the established goal, your next objective will be even higher; but the converse is not true. If you do worse, the company will […]

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    Intra-industry competition informs stock markets investment decisions

Intra-industry competition informs stock markets investment decisions

There is a large and growing body of research on peer effects in social sciences.  For instance, the economics literature on education has dealt extensively with peer effects in the classroom.  One of the hypotheses in this literature is that students who are exposed to unusually low achieving cohorts tend to score lower themselves.  While it is hard for […]

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    Hollywood studios appear to plan sequels before they produce the original movie

Hollywood studios appear to plan sequels before they produce the original movie

The recent box office success of Jurassic World, the latest Jurassic Park sequel, reminded me of my study about the use of real options in the motion picture industry*, which examined the application of this accounting tool to movie sequels.

A real option is the right, but not the obligation, to undertake a business decision. More importantly, a real-options approach to […]