incentives and control week 6

1. An outside director monitors the executive director on behalf of the shareholders of the Company

2. Shareholders are directly active in the company in which they they hold shares (shareholders activism)

• Examines determinants and consequences of compensation related shareholders activism (been growing over the years)
• increases the understanding of the effectiveness of mechanism currently available.


Shareholders proposal: an idea about improvements in the company
Vote-no campaign: organised efforts by shareholders to convince others to withheld their votes.

* if CEO total pay is higher, these firms are more often targeted by compensation related shareholders proposals.

* both firms with predicted pay and residual pay are targeted by shareholders activism.

* bigger firms and firms with lower returns are more often targeted.

Predicted pay= level of CEO compensation can be explained by economic determinants (efficient contracting)

Residual pay= the pay that can't be explained by economics determinants (rent extraction)

Firms with residual pay are more often targeted by shareholders activism
- only when there is residual pay the shareholders are successful in reducing compensation next year.

After disclosure of the ratings, the ratings went up. And thus the quality increased (performance measure)

After disclosure of the ratings, there are less quality deductions. And fewer cases of adjusting the medication afterwards.

*it improves the performance of the doctors.

Before disclosure people were more extreme about positive and negative performance.

Anchoring: using an anchor to help determine something

Conformity: people tend to conform to norms

Framing: the way some things are framed influence the decision making of people.

Intrinsic & extrinsic incentives:
In= want to do something good for ourselves
Ex= money, bonus etc

Investigate the performance effect of 3 incentive motivations:
1. Monetary incentives
2. Feedback related to self-regulation
3. Recognition related to social comparison and esteem

*monetary incentives are a good motivator.
* recognition also does a good job.
(Combining these does not increase the motivation)

Feedback is not as good as the other two components

Looking at data to figure out if there were any potential internal control problems. They found one and it was handed over to the internal auditors

TLA= technology licensing agreement.

Control problem: the licensor (owner) want to know how much was sold form the product. Only you have to rely on the data of the company to lend it to (they have an incentive to not tell the truth, they are underreporting royalties)

2 benefits of an audit:
1. Detecting and recovering underpayments
2. Deterring future misreporting by signalling monitoring effect.

3 elements determine the likelihood of underreporting:
1. Due to errors (quality of accounting system )
2. Reporting flexibility
3. Incentives to self-enforce

Solution: audit, scope and penalties
Audit, scope and possible penalties

Discussed inter-firm control.
Hold up problem: you have to invest in your systems for someone else. Only has value to you and is specific for one relation. Other party gets more power, and can elicit certain kind of behaviour.

1. Asymmetry of interdependence: distributors can be very dependent on manufacturer
2. The magnitude of interdependence: to what extent is their business strongly tight together.

To motivate the distributor to take actions preferred by the manufacturer, they use compensation.

• when the relation is more asymmetric, you are reluctant to make more relationship investments.
• proces integration works out financially.

(Renewal of contracts does not matter)