How Can the Sustainable Motivational Effect of Equity Incentives on Corporate Performance Be Exploited?—A Study Based on the Moderating Effect of Aspiration Level

Round 1

Reviewer 1 Report

The paper's topic and conducted research are very important and justified to be presented in a high-quality Journal. The subject is very important for the literature. The manuscript is well structured. The research is presented clearly and consistently, but some issues need to be addressed carefully. My decision is a minor revision with some amendments. Please see my comments and suggestions below.

Comment 1. Sections 2.2 and 2.3 could be combined.

Comment 2. In Section 4.1. Regression Results, the description of the results is confusing and should be further enhanced by the authors. For example, the results are shown in which tables, including from which rows and columns of the table are analysed. The following paper can be a good example to help you improve your paper:

- Qing, L.; Chun, D.; Dagestani, A.A.; Li, P. Does Proactive Green Technology Innovation Improve Financial Performance? Evidence from Listed Companies with Semiconductor Concepts Stock in China. Sustainability 2022, 14, 4600. https://doi.org/10.3390/su14084600

Comment 3. To avoid the problem of multicollinearity, I suggest that the authors show the multicollinearity by making a separate table.

Comment 4. Section 5.1 is not discussion, please rewrite the discussion.

Comment 5. I suggest that Section Discussion and conclusions could be separated. For example, Section 5 as a discussion and Section 6 as a Conclusion.

Comment 6. I hope the author(s) in their possible endeavors to improve reference Citations Style. Please, read "MDPI Reference List and Citations Style Guide": https://www.mdpi.com/journal/sustainability/instructions#references

Good luck for your work!

Author Response

Dear  reviewer:

Thanks to the editorial board and reviewers for their valuable comments and for giving us the opportunity to revise our manuscripts! We greatly appreciate both your help and that of the referees concerning improvement to this paper.

Based on the review comments received, the authors added and sorted out the corresponding contents of the related literature, reflected on the shortcomings of the research, revised the presentation, and did our best to improve the article. At the same time, we also proofread the references according to the revised content. Please review our responses and notes to the review comments item-by-item below.

We are sending the revised manuscript according to the comments of the review. We are using the “Track Changes” function to revise our papers.

If there are any other modifications we could make, we would like very much to modify them and we really appreciate your help.

Sincerely,

Comment 1. Sections 2.2 and 2.3 could be combined.

Reply:

Thank you for that excellent and insightful series of remarks. We accept the editor’s comments and combined Sections 2.2 and 2.3. Under the editor’s guidance, We first introduce the development of the concept of "Aspiration" in order to provide the reader with a clearer picture of this important concept. Secondly, we introduce the general framework of the relationship between equity incentives and corporate performance, starting from the concept of aspiration surplus. Following, we describe in detail the mechanism by which aspiration surplus affects the relationship between equity incentives and corporate performance. The specific modifications are as follows:

“……“Aspiration” was initially proposed by Dembo (1931) to capture changes in what individuals expect to achieve in an experiment[35]. Dembo described aspiration as a power-oriented behavior that changes an individual's behavior and attitudes on the path to a specific goal, once an individual sets that goal. This concept was developed in experiments and is widely used in real-life scenarios. Simon introduced the concept of "goal aspiration level", which is a concept whereby decision-makers usually classify goals into satisfactory and unsatisfactory outcomes, based on goal aspiration level. In effect, goal aspiration impacts an individual’s goal-driven perception and behav-ior[35,36]. In the performance-feedback model, rational managers make subsequent behavioral choices by assessing the gap between the firm's current actual performance and the “expected level of performance”. It also mean that the level of performance aspiration is “the reference point for the rational decision-makers to make subsequent behavioral decisions”.

When the corporate’s actual performance is higher than the expected performance sustainably, the bounded-rational manager defines the “above target expectation” state as an “aspiration surplus”. In the curvilinear relationship between equity incentives and corporate performance, when the financial results rises gradually with the increase of equity incentives, the increase of equity incentives implies the continuous accumu-lation of resources available to executives, and decision-makers tend to protect definite gains by being risk-averse and operate conservatively in the company's strategy from the perspective of prospect theory[16,37]. With the continuous expansion of aspiration surplus, the board of directors will grant higher equity to executives in this re-source-endowed state of the company. When executives own excessive shares, man-agement entrenchment will occur, and executives may have a stronger incentive to manipulate short-term profits to increase their benefits and decrease the company’s value. In this conflict, the curvilinear relationship between the equity incentive and the growth of the company's performance will be weakened. This means that good-performing firms tend to experience the phenomenon of “affluence makes people comfortable with the status quo”. We have four reasons for expecting executives who perceive business surplus to be more insensitive to the motivational effect of equity incentives on company performance:……”

Comment 2. In Section 4.1. Regression Results, the description of the results is confusing and should be further enhanced by the authors. For example, the results are shown in which tables, including from which rows and columns of the table are analysed. The following paper can be a good example to help you improve your paper:

- Qing, L.; Chun, D.; Dagestani, A.A.; Li, P. Does Proactive Green Technology Innovation Improve Financial Performance? Evidence from Listed Companies with Semiconductor Concepts Stock in China. Sustainability 2022, 14, 4600. https://doi.org/10.3390/su14084600

Reply:

Thanks to the editor's reminder. In this draft, we have rewritten Section 4.1 with reference to Qing's paper. The reworked section is as follows:

“……4.1. Descriptive Statistics and Correlations Coefficient

We display the results of descriptive statistics and correlation analysis for all var-iable in Table 2. The mean value of NegAd and PosAd are 0.045 and 0.024, respectively, indicating that aspiration loss and surplus have a significant difference in performance feedback between firms. The mean value of Life is 18.897, indicating that the sample companies have a long operating time. The mean value of Indboard and Owncon are 0.378 and 0.329, respectively, suggesting that the degree of specialization and disper-sion of equity in the sample firms is approximately the same. The mean value of Lev is 0.324, which indicates that the business risk of the sample companies is not high and is within a reasonable range. The mean value of Size is 21.529, showing that the sample companies have strong operational strength, which provides support for the imple-mentation of the equity incentive.

Table 2 also demonstrates the correlation of the variables. The correlations show that there is a significant positive correlation between executive shareholding and corporate performance. The aspiration loss and aspiration surplus are significantly correlated with corporate performance. Meanwhile, most control variables are signif-icantly related to firm performance, indicating that the above control variables are re-lated to firm performance and justifying the model design……”

Comment 3. To avoid the problem of multicollinearity, I suggest that the authors show the multicollinearity by making a separate table.

Reply:

Thanks to the editor's reminder, we accept this suggestion and present the results of the VIF in tabular form.

“……4.2. Variable Multicollinearity Test

Before the multivariate regression analysis, to avoid the effect of co-linearity be-tween variables, We conducted the variance inflation factor (VIF) test for all explana-tory variables and the results are shown in Table 3. Results are between 1.00 and 1.52, and the average VIF was 1.210. Referring to the Qing et al[66], We can infer that there is no multicollinearity problem among the variables selected in this research…….”

Table 3 VIF test

Comment 4. Section 5.1 is not discussion, please rewrite the discussion.

Comment 5. I suggest that Section Discussion and conclusions could be separated. For example, Section 5 as a discussion and Section 6 as a Conclusion.

Reply:

Thanks to the reviewers 's reminder that our Section Discussion and conclusions in the previous manuscript was still inadequate. We combined comment 4 and comment 5, separated the conclusion and discussion, and rewrote it. In this draft, we consider Section 5 as the conclusion section to summarize the research findings of this paper. Based on this, Section 6 is presented as the discussion section, focusing on the differences between this research and previous literature, the theoretical contributions, practical contributions and research limitations. This manuscript has been reworked as follows:

……“5. Conclusions

Based on the behavior theory of firm and the prospect theory, this paper examines the different effects of equity incentives on firm performance under different aspira-tions. Under conditions of aspiration loss, the implementation of equity incentives can significantly improve performance. In contrast, in the case of aspiration surplus, an equity incentive scheme cannot continue to enhance performance. This study takes the A-share panel data from 2011 to 2019, and finally obtains the following findings.

First, Our research finds that equity incentives do not always improve firm per-formance and implementing more equity incentives under aspiration surplus instead has a negative impact on corporate performance. The implementation of equity incen-tives significantly improves corporate performance during the initial period of aspira-tion surplus. However, with a widening surplus, a strong equity incentive also means a high-performance target, and the pressure of maintaining high-performance may lead to the “red queen effect”, “loss aversion behavior”, resource inertia and egotism. Therefore, implementing an equity incentive in the case of aspiration surplus is not conducive to the promotion of performance.

In addition, when the actual performance does not reach the expected level, the aspiration loss stimulates the psychological needs of executives to maintain their rep-utation and prove their self-excellence in management. In this case, the implementation of an equity incentive will more easily improve enterprise performance. Aspiration loss symbolizes a crisis scenario, this reinforces corporate risk-taking and stimulates prob-lem search to get out of performance difficulties [36,71]. Therefore, the implementation of equity incentives in an aspiration loss scenario has a more significant effect on im-proving corporate performance.

6. Discussion

6.2. Theoretical contribution

Our research is mainly concerned with three theoretical contributions. Firstly, we beyond knowledge about the linear perspective that dominates equity incentives liter-ature through the study of complex inverted-U relationships. We find that the positive effect of equity incentives on corporate performance occurs before, rather than after, the optimal aspiration level is reached. This curve relationship can be different from the view that "executives with more equity incentives will continue to engage in their work"[15,29]. As the Pierce and Aguinis (2013)[72] and Chen and Hexter (1993)[32] study found, some good things, such as motivation or support, can be counterproduc-tive when overprovided.

Second, this research makes up for the lack of previous research on the considera-tion of equity incentive play scenarios and provides a framework for exploring the sustainability effects of equity incentives. Specifically, our finding not only contributes to clarifying the boundary of the scenario in which the aspiration level is applied to the effect of equity incentives within the firm, but also provides a new path for improving the marginal diminishing effect of equity incentives. We offer an integrative theoretical framework based on BTOF and the prospect theory, to specify with more accuracy a curvilinear relationship between equity incentives and corporate performance. The findings are conducive to further revealing the boundary conditions of incentive mechanisms, and they provide a sufficient theoretical explanation for the " adversity leads to survival; affluence leads to ruin " effect of equity incentives in reality.

Third, our study examines the mechanism by which equity allocated to top man-agement affects firm value at different levels of aspiration, and to provide insights for exploring how individual cognitive biases affect the decisions of executive teams[73,74].

6.2. Practical contributions

The conclusions provide the following insights for regulators and the board of directors. First, considering the aspiration level as a crucial situational factor in equity incentives can guide companies to develop reasonably and effectively. The board of directors should endeavor to monitor the firm that continues to expand aspiration surplus, and prevent the executive team from doing what is detrimental to sharehold-ers' interests. ……”

Comment 6. I hope the author(s) in their possible endeavors to improve reference Citations Style. Please, read "MDPI Reference List and Citations Style Guide": https://www.mdpi.com/journal/sustainability/instructions#references

Reply:

We thank the editors for pointing out the deficiencies in the reference format of this paper. We revised the formatting of all references under the guidance of the reviewer. In the process of revising the content, we have removed literature that is not relevant to the present study and added some new references.

All reference formats are available for review in the revised manuscript. The following new literature has been added.

“Steinbuch P. I. Compensation: Theory, Evidence and Strategic Implications. Leadership & Organization Development Journal. 2004, 25,312-314. DOI:10.1108/01437730410531128

Mcanally M. L., Srivastava A.;Weaver C.D. Executive Stock Options, Missed Earnings Targets, and Earnings Management. Accounting Review. 2008,87,1-43, DOI: 10.2139/ssrn.925584

Armstrong C.S.;Jagolinzer A. D.;Larcker D. F. Chief executive officer equity incentives and accounting irregularities. Journal of Accounting Research, 2010, 48, 225-271. DOI:10.1111/j.1475-679X.2009.00361.x

Bhagat S;Bolton B. Corporate governance and firm performance: The sequel. Journal of Corporate Finance. 2019, 58,142-168.. DOI: 10.1016/j.jcorpfin.2019.04.006

Aiken, L. S.; West, S. G.; Reno, R. R. Multiple regression: Testing and interpreting interactions. Sage Publications.1991, pp 211-213

Borgholthaus C.J.; Iyer D.; O'Brien J . Corporate Governance and Performance Feedback: An Exploratory Analysis. Academy of Management Annual Meeting Proceedings. 2019, 18657. DOI: 10.5465/AMBPP.2019.18657abstract

Stubben F. Board of directors' responsiveness to shareholders: Evidence from shareholder proposals. Journal of Corporate Finance. 2010, 16, 53-72. DOI: 10.1016/j.jcorpfin.2009.07.005

Qing, L.; Chun, D.; Dagestani, A. A.; Li, P. Does Proactive Green Technology Innovation Improve Financial Performance? Evidence from Listed Companies with Semiconductor Concepts Stock in China. Sustainability. 2022,14, 4600. DOI: 10.3390/su14084600

Author Response File: Author Response.pdf

Reviewer 2 Report

ü  This study shows the importance of aspiration in the relationship between several equity incentives and corporate performance, guiding companies to focus on the implementation scenario as an influencing factor to achieve the sustainable incentive effect of equity incentives.

ü  The problem is correctly described in both the abstract and the introduction and represents a problem of relevance.

ü  This research reveals that when firms experience persistent aspiration surplus, the implementation of equity incentives is less effective than expected and shows a marginal decreasing effect. This finding is consistent with the view of the management entrenchment research results.

ü  The results given by this study contribute to the growing literature exploring how cognitive biases and limitations shape top management team (TMT) decision-making by discussing the mechanisms that can lead to equity incentives allocated to top management and their effect on firm value

ü  The study's limitations represent an essential opportunity for continued research over time.  

Author Response

Dear Reviewer:

Thank you for the positive comments on this paper. We have revised parts of the article based on the comments of other reviewer and hope that our research will be improved under the guidance of the reviewer.

Thanks again to the reviewer for reviewing and supporting the paper.

Best regards,

Author Response File: Author Response.pdf

Reviewer 3 Report

The paper explores the topic of the sustainable motivational impacts of equity incentives on corporate performance. Based on a sample of China A-share companies in a recent period, the authors provide some interesting results that may shed light on the extensive literature of compensation design. The paper can benefit from an editorial review to improve the readability and smoothness. 

Author Response

Dear Reviewer:

Thank you for the positive comments on this paper. We have revised parts of the article based on the comments of other reviewer and hope that our research will be improved under the guidance of the reviewer.

Thanks again to the reviewer for reviewing and supporting the paper.

Best regards,

Author Response File: Author Response.pdf