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Self-sorting, incentive compensation and human-capital assets

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  • A. Rashad Abdel-khalik

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.

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  • A. Rashad Abdel-khalik, 2003. "Self-sorting, incentive compensation and human-capital assets," European Accounting Review, Taylor & Francis Journals, vol. 12(4), pages 661-697.
    • Handle: RePEc:taf:euract:v:12:y:2003:i:4:p:661-697
    DOI: 10.1080/09638180310001628428
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    References listed on IDEAS

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    1. Jacob A. Mincer, 1974. "Introduction to "Schooling, Experience, and Earnings"," NBER Chapters, in: Schooling, Experience, and Earnings, pages 1-4, National Bureau of Economic Research, Inc.
    2. Jacob A. Mincer, 1974. "Schooling, Experience, and Earnings," NBER Books, National Bureau of Economic Research, Inc, number minc74-1.
    3. Hvide, Hans K. & Kaplan, Todd, 2003. "Delegated Job Design," CEPR Discussion Papers 3907, C.E.P.R. Discussion Papers.
    4. Jacob A. Mincer, 1974. "Schooling and Earnings," NBER Chapters, in: Schooling, Experience, and Earnings, pages 41-63, National Bureau of Economic Research, Inc.
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    2. Gospel J. Chukwu & Chibuike Camillus Ugo & Benjamin C. Osisioma, 2019. "Market Valuation of Human Capital in Nigerian Banks," International Journal of Academic Research in Accounting, Finance and Management Sciences, Human Resource Management Academic Research Society, International Journal of Academic Research in Accounting, Finance and Management Sciences, vol. 9(1), pages 21-29, January.
    3. Anne Wyatt & Hermann Frick, 2010. "Accounting for Investments in Human Capital: A Review," Australian Accounting Review, CPA Australia, vol. 20(3), pages 199-220, September.
    4. Corinne Ollier Bessieux & Emmanuelle Negre & Marie-Anne Verdier, 2022. "Moving from Accounting for People to Accounting with People: A Critical Analysis of the Literature and Avenues for Research," Post-Print hal-03889478, HAL.
    5. de Villiers, Charl & Jia, Jing & Li, Zhongtian, 2022. "Are boards' risk management committees associated with firms’ environmental performance?," The British Accounting Review, Elsevier, vol. 54(1).

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