Information and motivation issues in compensation design: An application to high technology companies

In this study I examine the ability of information and motivation issues to explain differences in compensation practices between high tech and non-high tech companies. Descriptive results indicate that compensation practices do differ along this dimension, and intuition suggests that both private information and motivation could be related to these differences. Via the use of two simple models--one based on adverse selection, the other on moral hazard--I develop several predictions with the potential to help distinguish between the two explanations. The information-based explanation predicts that the relationship between compensation outcomes and both stock and accounting-based performance measures (represented by slope coefficients in a linear regression) will be more strongly positive for high tech firms. Although the motivation-based explanation can yield a similar result, it suggests the additional restriction that the ratio of the stock and earnings slopes will be greater for high tech companies. The information-based explanation also suggests that movement of officers will be observed from large companies to small companies in the high tech sector, more so than for non-high tech firms. The results indicate that for small firms, where performance measures are likely to be more informative monitors of individual employees (relative to large firms), there is strong support for the information-based explanation in the regression analysis, and weak support in the officer movement data. Also, the small firm results are largely inconsistent with the motivation-based explanation. On the other hand, the large firm results are inconsistent with the information-based explanation, but only weakly support the motivation-based explanation.