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Economics essay

Economics essay

And add some economics theory which taught in lecture due to 1/3 marks will be based on it (list on the instructions as well), such as the Multitasking and perverse incentives, Performance measurement and appraisals, CEO compensation, Intrinsic motivation, Incentivising across the hierarchy, Relative performance and promotions. Beside just rephrase the source you have found, thank you.
Just link some of these theories to the source you got. U don�t have to put too many papers or reference in this essay. 3 or 4 are enough and link back those references to these theories.

Moreover, the introduction and conclusion are required, Just discuss why there’s a strong growth from 1990 -2007 and instances of large payments despite poor company performance,
have fuelled community concerns that executive remuneration is out of control.. maybe good training and educating? good team work and social environment? or what ever they mentioned in the reading..

Just give out some reasons and elaborate and explains or even bullshits some points. after that put some paper evidence(reference) to support the points, It does not have to be a very high level essay. im expecting a 60/100.

But the background readings and empirical in the assignment pdf must be used. and please give the internet link at the bibliography because i need to know where u find those reference.


Most theories in personnel economics relate to the effects of the monetary compensation or incentives that the workers received based on the output. The major conclusions to these theories are that workers in all cases react or respond to these incentives, a concept which forms the cornerstone in personnel economic theory. To be more specific, it’s a fact that the payment received on the basis of the output expected will basically induce the workers to increase the output. (Lazear 2000) These paper looks at the connection between compensation and accounting performance. The link that exists between incentives pays and company performance. Incentive pay includes options, restricted stock payments, long term compensation and future stock performance.


The last two decades has witness a steady rise in CEOs compensation that has not being directly related to their performance. The proponents of the agency theory and the CEO executive compensation have argued that the compensation should be in all occasions be aligned to the performance of the company. (Jensen and Murphy 1990) In Australia and Canada most of the compensation systems are based on organization performance while profit sharing is not common. (Long & Shields 2007) The current compensation strategies have pushed the workers and their CEOs to take advantage of the short term risks to make huge profits without considering the long term effect on the company. As a result of these actions most companies have taken measures to cushion the long term interest of the share holders by opting to offer long term executive compensation plans for the CEOs incentives to also act for the best interests of the share holders long term interests. The markets also do not fully incorporate the CEOs pay information at the time its made public as its intended to be a long term future incentive pay and based on future company performance.

The effects of the future stock performance in the last decade has not received any attention as a result of an implicit assumption that, given an efficient market, the investors will automatically capitalize the current present value of the company’s future performance to increase the stock price after the information on the new incentive pay goes public. (Fich and Shivdasani 2005)

These reasons may have propelled the executive compensation pay structures and incentives to rise rapidly between the years 1990 and 2007. The need to create a positive image on the company and also to influence the share prices positively besides obtaining CEOs who multitask.

However, the information on the CEO incentive compensation may not be reflected immediately on the company returns for some reasons. The first reason may be that the intrinsic compensation contracts for the CEO may in some cases incorporate both the unobservable and observable performance measures. If the performance measures that are not observable in the contract or are directly correlated with all the future performance measures that are observable then the variation in the current pay that is not basically explained by the variation found in the current performance measures that are observable should predict the future variation in all observable performance measures. (Hayes and Schaefer 2000) The extent that companies and managers draw their contracts on the net positive unobservable characteristics of the managers mostly suggests a relationship that’s positive between the pay and the future returns.

Source: Federal Reserve Economic data, St Bank of Louis,  

The highest peak of average CEOs total compensation package was in 2000 at $20,172,000 and later declined to $10,394,000 in 2009. This was at the center of the global economic crisis that originated mostly from the collapse of US giant corporations due to mismanagement and financial improprieties in the years 2008 and 2009.

 CEOs Total Av. Compensation $’000

Source: FRED, St Bank of Louis,

The empirical evidence below suggest a positive link between pay and incentives is illustrated by Lazear’s classic paper that examines the Safelite Glass Company shift to piece rate system in order to retain higher productivity employees. The diagram below indicates the shift to a piece rate system from the hourly rate with minimum guaranteed compensation. The lower productivity employees will not change or alter their behavior as a result of these changes but the higher productivity employees (illustrated by indifference curves marked X) will naturally increase their production to exploit the attractive new incentives available. Lazear argues that the change in compensation will predict the average increase in production per employee and also the average production ability per employee should also increase.

                                             Compensation Before and After at Safelite


                                                        (Piece work with guarantee)

                                                                                                                    B                 be – k


                                                  A                                                  X

                                                                                                                      Hourly Wages

                            0              eo                                  e*                            Output, e


After examining the production records of Safelite in detail over the change in the production levels, Lazear demonstrated that the two predictions were correct. The company’s average output was actually higher where the contract on piece rate was introduced and also the average production levels of new employees hired after the introduction of the piece rate system was higher than the surviving old employees of the hourly system. (Lazear 2000)

The design perspective in personnel economics allows companies to make optimal decisions based on varied constraints. Managerial technology Y= F (K, L, HRM) where the HRM policies have to optimized by increasing the incentive prevalence over time. The challenge however is that it’s difficult to have a uniform basis to measure incentive pay and also their varying effects on the policies of the HRM.

Employees are assumed to have the cost of effort identified as C (e). It varies with different individuals as well trained and educated employees have a less C (e) while the untrained employees have a higher C (e). Heterogeneity in employee leads to additional roles of compensation contracts that will attract the desired employee and provide the comparison between higher and the lower employee productivity.

The wage contracts are in the form 1 = α + βy. If we assume that C (e) is linked to the output and the workers options are set outside the options that are zero level utility.

There are basically two types of employees. There are employees who are risk neutral and those with the standard risk whose utility is neutral. They are identified with the following function

Ui = w – Ci (e), I = l, h

The relationship between the high CEO pay and the decline in company returns may be due to the less transparent nature of the CEOs non-cash stock option components of the compensation. Manager’s use of camouflage incentive compensation strategy to extract rent from the shareholders. For instance, the real value of the options payable may actually be distorted by such practices as option backdating and repricing. (Narayan & Seyhun 2008)

Most deferred compensations are mostly not disclosed. The relative performance and promotion is based on wage dynamics. If the deferred future pay which is mostly uncertain is also correlated with the pay that’s reported and made public then a relationship will exist between the pay and the returns in future. This kind of relationship however spells an uncertain future where the investors may under-react to the non-cash compensation just as much as they have under-reacted to other events on company affairs. (Kadiyala & Rau 2004) These would imply that there is a positive relationship that exists between the incentive compensation and the future performances of the stock prices.

The companies that compensate their CEOs highly seem also to experience the highest returns and performance levels. (Core, Holthausen and Larcker 1999) There other CEOs who may land on high compensations based on sheer lack or due to popular press. For example, companies would also like their CEOs to be ranked among the highest paid CEOs in the world by the Fortune magazine. Most companies would not allow their investments to be managed by CEOs who are below average or compensation that are below the standard market rates. These combinations of glamour that has been characterized by very high returns and even higher operating performance has been publicized to attract the companies to pay the best they can afford as its associated with the star effects that high pay produces the best CEOs globally hence the investors react by investing more in such firms whose shares then rise. These misconception has led to the some firms reduced performance as some CEOs are chosen based on other qualifications and considerations not just on merit alone. The inability of the shareholders to distinguish merit or skill from luck has led to the negative relation or notion between the executive CEO pay and the company’s future returns.

Finally highly paid CEOs are mostly overconfident which leads to higher pay demands. They later embarked on wasteful empire building strategies that lead to wealth destroying activities hence the negative relation between the CEO incentives for high compensation and the negative future company returns.


Core, J.E., Holthausen, R.W. and Larcker, D.F., 1999, Corporate governance, chief executive officer compensation, and firm performance, Journal of Financial Economics 51, 371- 406

Fich, E.M. & Shivdasani, A., 2005, The impact of stock-option compensation for outside directors on firm value, Journal of Business 78, 2229-2254

Federal Reserve Economic data, St Bank of Louis,

Hayes, R.M. & Schaefer, S., 2000, Implicit contracts and the explanatory power of top

executive compensation for future performance, Rand Journal of Economics 31, 279-293.

Jensen, M.C. & Murphy, K.J. 1990, Performance pay and top-management incentives, Journal of Political Economy 98, 225-264.

Kadiyala, P. & Rau, P.R., 2004, Investor reaction to corporate event announcements, Under-reaction or over-reaction? Journal of Business 77, 357-386.

Lazear, E.P., 2000, Performance Pay and Productivity, The American Economic Review, Vol. 90 No. 5 Dec 2000

Narayanan, M. P. and Seyhun, H.N., 2008, The Dating Game: Do managers designate grant

dates to increase their compensation, Review of Financial Studies 21, 1907-1945

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