Robert M. Wiseman

Reframing executive compensation: An assessment and outlook

This article develops and applies a new framework for under standing and interpreting the breadth of executive compensation research and theory. This framework sorts the literature along three dimensions that reflect three basic issues in compensation design: how to pay (specifying the mechanism for linking pay criteria to pay consequences), when to pay (specifying the criteria for awarding pay), and what to pay (form of pay consequence). This framework helps to highlight areas where executive compensation research has stalled, areas it has ignored, as well as providing direction for re-energizing the field by outlining questions for future research and theory building.

Decoupling risk taking from income stream uncertainty: A holistic model of risk

This paper builds and tests a holistic model of risk in organizations. Using structural equations modeling, we disaggregated risk into two distinct components, managerial risk taking and income stream uncertainty, or organizational risk. This allowed us to identify an array of organizational and environmental antecedents that have either been examined in isolation or neglected in previous studies about risk. Our results suggest that both organizational and environmental factors promote risk taking. Further, we found strong support for behavioral theory of the firm and agency theory on risk but not upper echelons theory. Our data also suggest that environmental characteristics have a negligible direct effect on organizational risk. Instead, the environment’s impact on risk occurs primarily through managerial choices. Copyright

Moving Closer to the Action: Examining Compensation Design Effects on Firm Risk

We examine the influence of CEO equity-based compensation on strategic risk taking by the firm. Building off the Behavioral Agency Model, Agency Theory, and Prospect Theory, we develop arguments about when equity-based compensation elements will increase or decrease executive risk propensity and, in turn, strategic risk taking. Incorporating a behavioral perspective into our models of incentive alignment provides us with new and potentially more accurate predictions about how individual elements of CEO pay will influence risk selection, as well as how equity compensation interacts with cash compensation and with other factors to influence risk preferences. In general, this study provides evidence that CEO equity-based compensation significantly influences strategic risk, but that this influence is more nuanced and complex than conventional treatments of executive compensation assume. In particular, we find that different forms of equity-based pay exhibit dissimilar influences on strategic risk and that their influence changes as their value and vesting status change. Second, we find that cash-based forms of pay moderate the incentive properties of equity-based pay, indicating that cash-based pay may affect how executives perceive risks associated with equity pay. Finally, we find that stock price volatility and board actions each also moderate the incentive effects of equity-based pay. In sum, our results argue for increased recognition of a behavioral perspective on executive compensation and greater precision in how we measure and model the incentive alignment properties of CEO compensation.

THE FIT BETWEEN CEO COMPENSATION DESIGN AND FIRM RISK

We examined the effects of unsystematic and systematic firm risk on CEO compensation risk bearing and total pay. Both the proportion of variable pay in CEO pay packages and their magnitude are curvilinearly related to unsystematic firm risk—that is, they are highest under conditions of moderate firm-specific risk. Our results are consistent with agency theory predictions that both performance-contingent pay and the greater earnings potential associated with that form of pay are highest when an agent has greater control over performance outcomes.

Towards a Social Theory of Agency

We challenge critics of agency theory who suggest that agency theorys value does not extend outside a narrow context dominated by egocentric agents seeking only to maximize wealth at the expense of the principal. Instead, we argue that agency theorys flexibility allows for its application to a variety of non‐traditional settings where the key elements of agency theory, such as self‐interest, information asymmetry, and the mechanisms used to control agency costs can vary beyond the narrow assumptions implied in traditional agency‐based research. We suggest that extending agency theory to diverse settings using a deductive approach can be accomplished by formally recognizing and incorporating the institutional context surrounding principal–agent (P–A) relations into agency‐based models. Thus, criticisms that agency theory fails to acknowledge the social context in which P–A relations occur provides not a barrier but an opportunity for extending our understanding of P–A relations to a variety of diverse contexts.

A Longitudinal Disaggregation of Operational Risk Under Changing Regulations: Evidence From the Savings and Loan Industry

The reported research examines the relative contributions of prospect and agency theory explanations for specific operational risks and subsequent firm performance in regulated and unregulated envi...

Fixed versus variable reference points in the risk-return relationship

Abstract Researchers using prospect theory in explaining Bowmans risk-return paradox have typically assumed a single fixed reference point, normally the industry median, in defining two decision contexts: gain and loss. Our findings suggest this reference point is elevated above industry median performance, and varies over time and across industries independent of industry performance. Consistent with the prospect theory, firms above this reference point were risk averse and those below it were risk seeking. We found no evidence of a second survival reference point for firms in trouble.

Comparing Alternative Explanations for Accounting Risk-Return Relations

Research into accounting risk-return relations largely relied on reference-based models of managerial choice. This focus ignores other explanations that may contribute to our understanding. Our study extends prior research by incorporating agency theory and implicit contracts theory into models based on the behavioral theory of the firm. We test our hypotheses in a large sample of US manufacturing firms in two different economic environments. Our results show some support for each theory, suggesting that multiple frameworks may better explain risk-return relations. Further, differences in results between the two economic environments imply that macroeconomic conditions may be important.

Integrating Behavioural and Economic Concepts of Risk into Strategic Management: The Twain Shall Meet

This paper develops an integrated framework of risk management and strategic competitive advantage that incorporates behavioural and economic notions of risk. The resulting model argues for the importance of risk-taking to sustainable competitive advantage and ultimately to firm performance. The model integrates framing effects of attainment discrepancy, transaction costs from implicit contracts theory and capital costs from finance theory. The proposed model suggests that continuous risk-taking by firms may help sustain competitive advantage and thus lower firm risk. This, in turn, effectively increases market returns to shareholders by ensuring earnings growth while simultaneously reducing the risk premium discount attached to a firm’s future income stream.

On the use and misuse of ratios in strategic management research

Management and especially strategy research rely heavily on the use of ratios to measure a variety of firm, industry, and societal characteristics. Most often, these ratios are created simply to control for size effects (i.e., scaling) emanating from differences in the size of firms, industries, populations, or national economies on the variables of interest. In addition, ratios may also hold theoretical meaning apart from that of their components. Despite the popularity of ratios and regardless of their purpose, the use of ratios is not without controversy. In particular, several studies have demonstrated that the use of ratio measures in correlations and multiple regressions can exaggerate relations of interest leading to biased and unstable results. In this chapter, I review the debate surrounding the use of ratio measures, discuss the problems for estimation and inference that are likely to arise when ratios are used in statistical estimation, and provide alternatives to the use of ratio variables that still satisfy the purpose for which ratio measures are often created.