Three Essays on Executive Compensation - KOPS - Universität ...

Profit Sharing with Executives
debt/equity ratios, lower dividend yields, but pay higher cash compensation to executives
and are more likely to use stock option plans than ”non-growth firms” with
less promising investment opportunities. Ryan Jr and Wiggins III (2002) investigate
the relation between corporate compensation policy, R&D investments, industryand
firm-specific characteristics.
They find that firms with superior growth opportunities
9 exhibit a higher ratio of R&D expenditures to total assets. Executive
compensation in firms with a higher R&D ratio consists to a larger part of stock
options and less of cash bonuses and company stock compared to executive compensation
in firms with inferior growth opportunities.
Third, our work is related to the literature on profit sharing. This literature
typically investigates how and why firms let employees participate in firm profits
and whether profit sharing has an impact on firm performance. The focus of this
literature is on profit sharing with employees below the top management. However,
findings in this literature may help to understand why also profit sharing with
executives differs across industries and firms. For example, Kruse (1996) examines
firms with profit-sharing plans and finds that profit sharing is more likely in firms
with high R&D expenditures and higher volatility in profits. He argues that profitsharing
arrangements help to motivate interdependent and complex R&D work in
firms with constantly developing technology. Moreover, profit sharing helps firms
experiencing high volatility in company performance as an insurance mechanism to
share uncertainty with employees. Risk-averse employees may be compensated for
taking financial risk with higher overall compensation levels. Support for the latter
is provided by Hart and Hübler (1991). They find that employees participating in
profit sharing arrangements receive higher salaries (excluding the bonus from the
profit-sharing arrangement), and that the shared amount of profit is increasing in
salary levels. Moreover, profit sharing is more likely in larger firms.
In a meta study that combines evidence from the profit-sharing literature, Weitzman
and Kruse (1990) conclude that profit sharing has a more significant effect on
productivity than employee ownership. This finding may explain why many firms
choose to provide managerial incentives in the form of profit-based cash bonus payof
the firm being included in growth-oriented mutual funds. They define ”growth firms” and
”nongrowth firms”, respectively, as firms ranked in the top and bottom quartile of this index.
9 Growth opportunities are measured by the market-to-book value of assets, calculated as the
market value of equity plus the book value of debt, divided by the sum of book values of equity
and debt.
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