From SS12 Corporate Governance (Schweser Book 3 Page 183)
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if a manager is doing well then then they are likely to accept a high probability of being fired for increased compensation. This is referred to as a "substitute incentive"

if a manager is not doing well then they are likely to accept a low level of pay as well as high probability of being fired. This is referred to as a "complement" incentive.
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I am confused by this. I would have thought that a low probability of being fired is an incentive which can be substituted for compensation e.g. the weak manager. This would seem to mirror the description that "the stronger the implicit incentive, the lower is the need for explicit incentives"


Any ideas?

Can anybody explain this?

I am not sure about the above example... but I believe the overall point they are attempting to make in the reading is Explicit and Implicit incentives can be both complments and substitutes for eachother, but the majority of the time the two are substitutes.

I understand the general point, my question is related specifically to the Schweser examples (as they seem to be the complete opposite of the definition for substitute and compliment)

and more confusion....from the question bank

"if a manager is confident in her abilites then she would be willing to accept a higher probability of being fired for increased compensation. In this case, a strong implicit incentive would be accompianied by an attractive compensation package and the two types of incentives would be measure as substitutes"

"Implicit incentives are usually substitues for explicit incentives because the stronger the implicit incentive , the lower the need is for explicit incentives"

How can the phrase "be accompianied by" be used for substitutes...i.e. one thing replacing another!

this is a total mess



Edited 1 time(s). Last edit at Wednesday, April 28, 2010 at 10:12AM by algo-rhythm.