Professor Jen Choi Awarded by the American Accounting Association for Research on CEO Compensation Initiatives

Choi’s research examines critical business issues such as executive compensation, management control systems, and supply chain relationships. Within these topics, she explores how corporate policies such as incentives affect the companies and industries that adopt them. For example, the awarded paper, “Sales-based CEO Incentive and Its Effect across the Supply Chain,” examines corporations' use of sales performance measures in CEO incentive contracts.

In the following Q&A, Choi discussed some of the key findings of her award-winning paper and opportunities for future research.

What are some of the downsides of sales-based CEO incentives? 

Approximately half of S&P 1500 companies use sales figures as a metric in their CEO compensation packages, with studies supporting the notion that this incentivizes growth, innovation, and competitive behavior. However, there's a lack of insight into the negative effects of such incentives. My research illuminates the issues that arise, such as inefficient inventory management and increased order variability for suppliers. Sales performance metrics motivate CEOs to maintain ample stock to prevent lost sales and demand information, which generates larger order fluctuations for suppliers. This contributes to the “bullwhip effect,” a phenomenon that increases order volatility up the supply chain.

Based on your findings, what policies should companies adopt to better balance executive compensation and efficient resource management?

While sales performance measures can be beneficial and are definitely becoming popular, firms need to carefully consider the costs that these measures can incur. By adding sales performance measures, firms are putting more weight on sales growth while reducing that on efficiency improvements. The consequences of these measures are relatively unknown, and quantifying the costs can be difficult as some of the costs can be borne by suppliers, who are vital to the company's value-creation process.

What is your research focused on now? Do you have any projects coming up? 

My research focuses on how incentive systems are designed, how people react to these systems, and how their reactions change performance. From my PhD years, I have been interested in the relationship between managerial incentives and factors outside of the firm — particularly the supply chain and technology advancements. 
Building off this paper, a colleague at the University of Michigan and I are analyzing how revenue-related performance metrics influence managerial decisions regarding a company's cost structure.