Sustainable Investment and Corporate Governance Working Papers, Sustainable Investment Research Platform
No 2010/11:
Preferences for Short-Term Versus Long-Term Bonuses for Stock Investments
Martin Hedesström, Maria Andersson ()
, Tommy Gärling and Anders Biel
Abstract: Performance-related bonuses in the finance sector are
considered important tools to provide incentives. An example is that stock
portfolio managers are awarded bonuses conditionally on their portfolios
producing superior returns either relative to an index or equivalent funds.
Concerns are however expressed that bonuses to portfolio managers are based
on too short time intervals, which may impact negatively on the degree to
which environmental and social factors are taken into account in investment
decisions. The question addressed in this article is how bonus schemes can
be designed so that delayed payouts will be equally motivating as
short-term payouts. We have conducted two experiments to investigate
preference for bonus payments that are paid out either frequently of
infrequently. In Experiment 1 employing 27 undergraduates, preferences were
measured for one certain long-term bonus versus four certain bonuses evenly
distributed across time. A majority chose the short-term bonuses, and in
order for a long-term bonus to be equally preferred the results showed that
it needs to be approximately 40 percent higher than the four combined
short-term bonuses. Experiment 2 employing another 36 undergraduates
introduced uncertainty of outcomes which more accurately reflects the
setting faced by stock investors. A four-year bonus is compared to four
one-year bonuses. Uncertainty was the same, decreasing or increasing over
the four years. The results showed that decreasing uncertainty made a
majority prefer the four-year bonus to the added one-year bonuses. In
conclusion, introducing uncertainty in choices concerning future outcomes
is shown to reduce the extent to which future bonus outcomes are discounted
relative to immediate bonus outcomes.
Keywords: Portfolio management; Performance-related bonus; Time discounting; (follow links to similar papers)
20 pages, June 18, 2010
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