Self-sorting, incentive compensation and human-capital assets

Abstract

Skilled labour has gained significance as a production factor in the age of information technology, but accounting does not recognize human capital as an asset that contributes to the firm's earning power. This paper suggests a method to develop a latent index to proxy the managerial-skill component of human capital. The proposed index depends on the empirical validity of self-sorting theories for managerial tasks and the choice of the type of at-risk (i.e. outcome-contingent) compensation contract. The empirical analysis uses data on compensation of executive members of the board of directors, their personal attributes (experience, risk aversion and wealth), firm-specific variables (profitability growth rates, organizational complexity and operating risk), and type of industry. The extent to which equity markets value the predicted labour skills shows that investors in the marketplace recognize human capital even though accounting does not. The valuation coefficient on the variable imputed for human capital is significant for all years examined. This study contributes to the literature by showing that relative incentive compensation (incentive pay per dollar of fixed salary) is a viable surrogate for human capital defined as the skills embodied in people.

A Theory of Net Debt and Transferable Human Capital

“…Compared to the term rH 1−p this is, however, a second order determinant of managerial compensation as was illustrated in Figure 2. general, transferable skills become more important, which is supported by the empirical findings of Frydman and Saks (2010) and Murphy and Zabojnik (2007). Abdel-Khalik (2003) finds that human capital factors are a significant determinant of the ratio of performance-based compensation to base salary. This ratio ranges from 2.85 for public utilities to 10.34 for computer and information technology.…”

Exploring the Effects of Corporate Governance on Intellectual Capital Disclosure: An Analysis of European Biotechnology Companies

“…Despite the wealth of research on ICD (i.e. Abdel-Khalik, 2003;Habersam and Piber, 2003), we still have much to learn about the extent to which corporate governance might be one of the determinants of ICD. Bozzolan et al (2003) documented a positive effect of industry and company size on the level of intellectual capital disclosure for Italian-listed companies.…”

A Stakeholder–Human Capital Perspective on the Link between Social Performance and Executive Compensation

“…Executives build human capital through experience accumulated over time that yields returns in the form of compensation. Executives who believe they possess specific forms of human capital will seek out employment with firms in which they can gain an economic return on their skills (Abdel-khalik, 2003). Human capital theory holds that two basic forms of human capital exist: general human capital, which is valuable to many firms, and firm-specific human capital, which only generates value in one specific firm (due to complementarities with firm characteristics, processes, and technologies) (Becker, 1962;DeAngelo, 1982).…”

“…Because they must coordinate relationships with a broader array of stakeholders, executives of firms that proactively manage their socially responsible activities (i.e., firms with more CSP strengths) must perform more complex, demanding tasks and, consequently, develop greater human capital than executives at firms with fewer CSP strengths. 1 Because executives should be aware of the increased demands required to manage stakeholders in firms with more CSP strengths, executives who possess the requisite skills are likely to pursue opportunities in firms with CSP strengths where such skills can be rewarded (Abdel-khalik, 2003;Lazear, 2000). Thus, the relationship between firm CSP strengths and initial executive compensation should be positive.…”