Paul Oyer

Discretion in Executive Incentive Contracts: Theory and Evidence

We examine the role of discretion in executive incentive contracts, and explore the trade-offs firms face in choosing among imperfect objective measures of individual performance, potentially more accurate but non-verifiable subjective measures, and overly broad objective measures of company-wide performance that include the performance of all agents in the firm. We generate implications and test the model empirically using a proprietary dataset of executive bonus plans. Consistent with our model, we find that discretion is less important in determining CEO pay than the pay of other executives. We also find that discretion is relatively important in determining executive bonuses at larger and privately held firms and that more diversified firms are relatively less likely to compensate their business unit managers based on firm-wide performance. Finally, we consider (and largely dismiss) tax-related explanations for our results.

Coworker Complementarity and the Stability of Top-Management Teams

We analyze changes in the composition of top management teams when a key member of the team (the chief executive officer [CEO]) departs. We find that the probability of non-CEO top manager turnover increases markedly around times of CEO turnover. Further, the magnitude of this increase depends on the relations between the tenure of the manager and tenures of the departing and incoming CEOs. Departure of a long-tenured CEO has a larger effect on turnover probability for a long-tenured non-CEO manager than for a short-tenured manager. Succession of a long-tenured manager as CEO has a larger effect on turnover probability for a short-tenured non-CEO manager than for a long-tenured manager. We argue that these findings are at least partially the result of complementarities across these groups of coworkers that affect the value of employment relationships between senior executives and firms. Copyright 2006, Oxford University Press.

A Theory of Sales Quotas with Limited Liability and Rent Sharing

Sales quotas are a fixture of sales compensation plans and are often associated with a significant discrete bonus. This article shows that, under certain assumptions about salesperson utility and the distribution of sales outcomes, the optimal compensation is a discrete bonus for meeting a sales quota. The results are similar when the assumption of agent risk neutrality is relaxed. The model has implications for many moral hazard problems where the agent has a liability limitation and job‐specific skill.

Layoffs and Litigation

We study a possible link between two recent U.S. labor market trends: increased wrongful termination litigation and more frequent mass layoffs. We argue that if workers are more likely to sue when fired than when dismissed as part of a layoff, then increases in the expected costs to firms of such suits should induce substitution toward layoffs and away from individual firings. Our empirical analysis supports this assertion, showing that shortly after the passage of the Civil Rights Act of 1991, the methods of displacement changed differently by race but changes to the overall level of displacement were consistent across races.

The Making of an Investment Banker: Macroeconomic Shocks, Career Choice, and Lifetime Income

New graduates of elite MBA programs flock to Wall Street during bull markets and start their careers elsewhere when the stock market is weak. Given the transferability of MBA skills, it seems likely that any effect of stock returns on MBA placement would be short-lived. In this paper, I use a survey of Stanford MBAs from the classes of 1960 through 1997 to analyze the relationship between the state of the stock market at graduation, initial job placement, and long-term labor market outcomes. Using stock market conditions at graduation as an instrument for first job, I show that there is a strong causal effect of initial placement in investment banking on the likelihood of working on Wall Street anywhere from three to twenty years later. I then measure the investment banking compensation premium relative to other jobs and estimate the additional income generated by an MBA cohort where a higher fraction starts in higher-paid jobs relative to a cohort that starts in lower-paid areas. The results lead to several conclusions. First, random factors play a large role in determining the industries and incomes of members of this high-skill group. Second, there is a deep pool of potential investment bankers in any given Stanford MBA class. During the time these people are in school, factors beyond their control sort them into or out of banking upon graduation. Finally, industry-specific or task-specific human capital appears to be important for young investment bankers.

Co-Worker Complementarity and the Stability of Top Management Teams

We analyze changes in the composition of top management teams when a key member of the team (the chief executive officer [CEO]) departs. We find that the probability of non-CEO top manager turnover increases markedly around times of CEO turnover. Further, the magnitude of this increase depends on the relations between the tenure of the manager and tenures of the departing and incoming CEOs. Departure of a long-tenured CEO has a larger effect on turnover probability for a long-tenured non-CEO manager than for a short-tenured manager. Succession of a long-tenured manager as CEO has a larger effect on turnover probability for a short-tenured non-CEO manager than for a long-tenured manager. We argue that these findings are at least partially the result of complementarities across these groups of coworkers that affect the value of employment relationships between senior executives and firms. Copyright 2006, Oxford University Press.

The Structure of Wages and Internal Mobility

As the fields of personnel economics and organizational economics have become more visible in recent years, more economists, practitioners, and policymakers have become interested in the internal workings of firms. Fortunately, at the same time as interest in these areas has grown, new data sets have emerged that provide consistent personnel data from a wide variety of firms. This paper provides an example of how newly available data can be used to analyze internal labor markets and suggests how such data can be used to address other issues. Basic questions in personnel economics include how firms set wages and how people move between jobs (within and across firms). Answering these questions is essential to assessing the relative importance of theoretical models as explanations of the nature of employment relationships. These models include agency theory, matching, and search theory, among others. Historically, most attempts to study these models were limited to data sets that are drawn from a random sample of individuals with no identification of firms, such as the Current Population Survey (CPS). While much can be learned from such studies, much of the inference is indirect and the data may suffer from inconsistent or inaccurate self-reported data. An alternative strategy, used by, for example, Lazear (1992), George Baker et al. (1994), and Kenn Ariga et al. (1999), is to procure detailed personnel information from a single firm and use it to study the policies at that firm. While these papers were successful at providing details of the individual firms, they leave open the question of how widely the results generalize, especially given that the results are not consistent even across these three papers, which are based on different firms. An important step in getting past the limits of CPS-style and individual-firm data is to find data sets that provide employee details for numerous firms. Such data sets have been created in the United States, France, Sweden, and other countries. As John M. Abowd and Francis Kramarz (1999) show, these data sets take many forms and, like the data that preceded them, have varying strengths and weaknesses. They have already been used, according to Abowd and Kramarz (1999), in over 100 studies of more than 15 countries. That paper provides details on many of these studies, as well as comparing some of the features of the various data sets. Although the U.S. data have many virtues, they lack job information. A key advantage of the Swedish data used here is its detailed and accurate job classifications. This makes it possible to determine whether job openings are filled internally or externally and to follow employees as they change jobs. The data include many firms, a long panel of years, and accurate wage data, allowing the study of the relative importance of firms and jobs on wage changes and levels. The main results of this paper are as follows. First, the Swedish firms studied fill a significant † Discussants: Henry Farber, Princeton University; Lawrence Katz, Harvard University; Derek Neal, University of Chicago.

The Timeliness of Performance Information in Determining Executive Compensation

Abstract We study whether boards of directors concentrate on performance near compensation decision times rather than providing consistent incentives for chief executive officers (CEO) throughout the fiscal year. We show empirically that managers can profit by moving sales revenue among fiscal quarters. Though this may suggest that boards use short-term trends when determining rewards, we find evidence consistent with boards tying pay to recent sales growth so as to use the best information about future performance. We also find that the timing of profits throughout the year does not affect CEO pay, which may suggest that smoothing firm income is important to CEOs.

Are There Sectoral Anomalies Too? The Pitfalls of Unreported Multiple Hypothesis Testing and a Simple Solution

The recent emphasis on sector-specific investment strategies has led to the emergence of industry-specific calendar anomalies, notably the technology sector “summer swoon”. A standard t-test implies that these price movements provide arbitrage opportunities. However, this test fails to account for the many tests that may have preceded the swoon’s discovery. We propose the use of the Bonferroni correction to account for this unreported testing. Its application reverses the conclusions about the summer swoon and finds no evidence of calendar-based price patterns in any other sector. We also use the Bonferroni correction to revisit previously documented, market-wide, anomalies. Conclusions about the most widely cited anomalies (e.g., the January effect) are unchanged, but evidence for some other “anomalies” is substantially weakened. Our results emphasize that in evaluating a proposed anomaly, sectoral in nature or otherwise, it is crucial to account for the hypotheses that were likely to have been tested but not reported.

Exploration for Human Capital: Evidence from the MBA Labor Market

We empirically investigate the effect of uncertainty on corporate hiring. Using novel data from the labor market for MBA graduates, we show that uncertainty regarding how well job candidates fit with a firm’s industry hinders hiring, and that firms value probationary work arrangements that provide the option to learn more about potential full-time employees. The detrimental effect of uncertainty on hiring is more pronounced when firms face greater firing and replacement costs, and when they face less direct competition from other similar firms. These results suggest that firms faced with uncertainty use similar considerations when making hiring decisions as when making decisions regarding investment in physical capital.