Iny Hwang

CEO Human Capital Based on the Compensation Schemes

Prior research in management accounting has focused on the pay-performance incentive contracts to examine compensation of top executives. However, the recent economic crisis lessens the validity of the pay-for-performance argument because many executive officers continue to receive a substantial amount of compensation despite their firms’ poor performance. Departing from the main stream of prior research, this paper investigates the role of human capital on the executive compensation determination. Building on the labor economic literature on human capital theory, I hypothesize that CEO compensation schemes depends on CEO human capital. We document that two components of human capital play mutually exclusive roles in determining the fixed pay and the incentive pay. Our finding suggests the importance of CEO human capital to understand the CEO compensation schemes in recent decades.

How Does Ratchet Effect Rise and Sag? Empirical Evidence with Respect to Target Ambiguity, Interactive Target Setting, and Measurement Noise

This study builds on the ratchet principle literature and examines the subordinate’s incentive to reduce the effort level in target setting procedure. Using the data containing both actual and target performances, we provide direct empirical evidences as to the predictions by the ratchet principle theory. We find that, when the target performance in the future period is substantially influenced by the current performance (ratchet principle), subordinates lose incentives to exert to maximize the current performance (ratchet effect). We next investigate the impact of target ambiguity on the magnitude of the ratchet effect. We find stronger ratchet effect when it is difficult for the superior to figure out the true level of target performance. That is, in such circumstances where the superior possesses limited prior knowledge about the indubitable target performance, subordinates are reluctant to exert for the best level of current performance because the target for the following period must depend largely on the realized performance. Furthermore, our empirical analyses suggest two remedies for the subordinate’s effort reduction incentive given the ambiguous target: increased participation of subordinates in the target setting process and increased noise in the performance measure.