George P. Baker

The Wage Policy of a Firm

Salary data from a single firm are analyzed in an effort to identify the firms wage policy. We find that employees are partly shielded against changes in external market conditions; that wage variation within a job level is large both cross-sectionally and for individuals over time, often leading to substantial real wage declines; that wage increases are serially correlated even controlling for observable characteristics; and that promotions and wage growth are strongly related, even though promotion premiums are small relative to the large wage differences between job levels. None of the major theories of wage determination can alone explain the evidence.

CEO Incentives and Firm Size

What determines CEO incentives? A confusion exists among both academics and practitioners about how to measure the strength of CEO incentives, and how to reconcile the enormous differences in pay sensitivities between executives in large and small firms. We show that while one measure of CEO incentives (the dollar change in CEO wealth per dollar change in firm value) falls by a factor of ten between firms in the smallest and largest deciles in our sample, another measure of CEO incentives (the value of CEO equity stakes) increases by roughly the same magnitude. We resolve the confusion about which of these measures better reflects CEO incentives by developing and solving a model that allows CEO productivity to differ for firms of different sizes. The crucial parameter is shown to be the elasticity of CEO productivity with respect to firm size. Our empirical results suggest that CEO marginal products rise significantly, and overall CEO incentives are roughly constant or decline slightly with firm size. We also show that the appropriate measure of incentives depends on the type of CEO activity being considered. For activities whose dollar impact is the same for large and small firms (such as the purchase of a corporate jet), the dollars-on-dollars measure is appropriate, and large firms suffer significant agency problems due to their weak incentives. For activities whose percentage impact is similar across firms of different sizes (such as a corporate reorganization) the equity stake measure is better, and the incentive problem faced by large firms is not as severe. Finally, using a multi-task model, we discuss the implication of our findings for the design of control systems.

Distortion and Risk in Optimal Incentive Contracts

Performance measurement is an essential part of the design of any incentive system. The strength and value of incentives in organizations are strongly affected by the performance measures available. Yet, the characteristics of valuable performance measures have not been well explored in the agency literature. In this paper, I use a multitask model to develop a two-parameter characterization of performance measures and show how these two parameters-distortion and risk-affect the value and use of performance measures in incentive contracts. I show that many complex issues in the design of real-world incentive contracts can be fruitfully viewed as tradeoffs between these two features of performance measures. I also use this framework to analyze the provision of incentives in several specific environments, including R&D labs and nonprofit organizations.

Incentives and cooperation: the joint effects of task and reward interdependence on group performance

We examine the joint effects of task interdependence and reward interdependence on group behavior and performance. We develop a model that predicts that task and reward interdependence will interact to increase performance, and present results of a laboratory experiment that confirms our prediction. We explore the efficacy of group reward systems for different task designs, and the relationship between cooperation and performance. We confirm earlier results on the weakness of the free-rider effect in small face-to-face groups. We also find, surprisingly, that while reward interdependence is important to performance, task interdependence, but not reward interdependence, drives observed cooperative behavior. This last result suggests caution in interpreting the efficacy of changes in the design of work. Such changes, if unaccompanied by changes in the design of the reward system, are likely to appear successful in terms of observed cooperation, but may not enhance performance.

Organizational changes and value creation in leveraged buyouts: The case of the O.M. Scott & Sons Company

Abstract This study documents the organizational changes that took place at the O.M. Scott & Sons Company in response to its leveraged buyout. Our findings confirm that both the pressure of servicing a heavy debt load and management equity ownership lead to improved performance. Equally important at Scott, however, and undocumented in large-sample studies, are debt covenants restricting how the cash required for debt payments can be generated, the adoption of a strong incentive compensation plan, a reorganization and decentralization of decision making, and the relationship between managers, the leveraged buyout sponsors, and the board of directors.

Growth, corporate policies and the investment opportunity set

Abstract Gaver and Gaver take on a difficult project with their paper, and succeed in bringing insight to this important and growing area. The paper is somewhat weakend by the failure to distinguish between equity value growth and asset growth, and by a sample segmentation technique that separates firms into growth and nongrowth subsamples, and finds that the growth firms are larger and substantially more profitable. The paper also fails, as do all the papers in this area, to deal with the fundamental simultaneity between the investment opportunity set and corporate policy decisions.