Economic determinants of group versus individual compensation schemes for senior executives

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Conference Proceeding
2007 AFAANZ Conference, 2007, pp. 1 - 66
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This paper investigates firm characteristics associated with the choice of individual versus group compensation schemes for senior executives below the CEO level. We define individual compensation schemes where senior executives are compensated independently from other senior executives, where incentive compensation is linked to individual performance. In contrast, group compensation schemes are defined where senior executive compensation is jointly determined with other senior executives, with compensation linked to common incentives. This paper is motivated by limited evidence on compensation schemes for senior executives beyond the CEO, limiting critical evaluation of senior executives compensation. Preliminary evidence using Australian data provides support that individual compensation schemes are adopted by firms where individual senior executive inputs (effort) and outputs are separable and observable. We also find support that group compensation schemes are adopted where there are efficiencies from senior executive co-operation and interdependencies between executives, such as in integrated firms. The empirical evidence suggest that there are important differences between how firms set changes in total compensation as apposed to the mix of long and short term incentive components. The findings contribute to the ongoing debate surrounding the determination of appropriate corporate governance mechanisms in the presence of agency conflicts, and especially executive compensation schemes.
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