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Agency, Delayed Compensation, and the Structure of Executive Remuneration

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  • Eaton, Jonathan
  • Rosen, Harvey S

Abstract

In this paper we examine the factors affecting the structure of executives' compensation packages. We focus particularly on the role of various types of delayed compensation as means of "bonding" executives to their firms. The basic problem is to design a compensation package that rewards actions that are in the long-run interest of the stockholders. Firms must take into account (1) their ability to discern unfortunate circumstances from mismanagement; (2) the extent to which a compensation package forces the executive to face risks, beyond his control; and (3) the willingness of a given executive to bear this risk. We use our theory to interpret some executive compensation data from the early 1970's. The results are generally in line with the theoretical predictions.

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Bibliographic Info

Article provided by American Finance Association in its journal Journal of Finance.

Volume (Year): 38 (1983)
Issue (Month): 5 (December)
Pages: 1489-1505

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Handle: RePEc:bla:jfinan:v:38:y:1983:i:5:p:1489-1505

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  1. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October.
  2. Masson, Robert Tempest, 1971. "Executive Motivations, Earnings, and Consequent Equity Performance," Journal of Political Economy, University of Chicago Press, vol. 79(6), pages 1278-92, Nov.-Dec..
  3. Goldberg, Victor P., 1980. "Bridges over contested terrain : Exploring the radical account of the employment relationship," Journal of Economic Behavior & Organization, Elsevier, vol. 1(3), pages 249-274, September.
  4. Rosen, Sherwin, 1974. "Hedonic Prices and Implicit Markets: Product Differentiation in Pure Competition," Journal of Political Economy, University of Chicago Press, vol. 82(1), pages 34-55, Jan.-Feb..
  5. Wilbur G. Lewellen, 1968. "Executive Compensation in Large Industrial Corporations," NBER Books, National Bureau of Economic Research, Inc, number lewe68-1, July.
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Cited by:
  1. Trond Randøy & Jim Nielsen, 2002. "Company Performance, Corporate Governance, and CEO Compensation in Norway and Sweden," Journal of Management and Governance, Springer, vol. 6(1), pages 57-81, March.
  2. Kedia, Simi, 2006. "Estimating product market competition: Methodology and application," Journal of Banking & Finance, Elsevier, vol. 30(3), pages 875-894, March.
  3. Bushman, Robert M. & Indjejikian, Raffi J. & Smith, Abbie, 1996. "CEO compensation: The role of individual performance evaluation," Journal of Accounting and Economics, Elsevier, vol. 21(2), pages 161-193, April.
  4. Hingorani, Archana & Lehn, Kenneth & Makhija, Anil K., 1997. "Investor behavior in mass privatization: The case of the Czech voucher scheme," Journal of Financial Economics, Elsevier, vol. 44(3), pages 349-396, June.
  5. Oxelheim, Lars & Randøy, Trond, 2001. "The Impact of Foreign Board Membership on Firm Value," Working Paper Series 567, Research Institute of Industrial Economics.
  6. Waldron, Theodore L. & Graffin, Scott D. & Porac, Joseph F. & Wade, James B., 2013. "Third-party endorsements of CEO quality, managerial discretion, and stakeholder reactions," Journal of Business Research, Elsevier, vol. 66(12), pages 2592-2599.
  7. Muurling, Rutger & Lehnert, Thorsten, 2004. "Option-based compensation: a survey," The International Journal of Accounting, Elsevier, vol. 39(4), pages 365-401.
  8. Engesaeth, E.J.P., 2011. "Managerial compensation contracting," Open Access publications from Tilburg University urn:nbn:nl:ui:12-4807459, Tilburg University.
  9. Antia, Murad & Pantzalis, Christos & Park, Jung Chul, 2010. "CEO decision horizon and firm performance: An empirical investigation," Journal of Corporate Finance, Elsevier, vol. 16(3), pages 288-301, June.
  10. Yermack, David, 1995. "Do corporations award CEO stock options effectively?," Journal of Financial Economics, Elsevier, vol. 39(2-3), pages 237-269.
  11. Tzioumis, Konstantinos, 2008. "Why do firms adopt CEO stock options? Evidence from the United States," Journal of Economic Behavior & Organization, Elsevier, vol. 68(1), pages 100-111, October.
  12. Dee, Carol Callaway & Lulseged, Ayalew & Nowlin, Tanya S., 2005. "Executive compensation and risk: The case of internet firms," Journal of Corporate Finance, Elsevier, vol. 12(1), pages 80-96, December.
  13. Mehran, Hamid, 1995. "Executive compensation structure, ownership, and firm performance," Journal of Financial Economics, Elsevier, vol. 38(2), pages 163-184, June.
  14. Uchida, Konari, 2006. "Determinants of stock option use by Japanese companies," Review of Financial Economics, Elsevier, vol. 15(3), pages 251-269.
  15. Basma Sellami Mezghanni, 2010. "How Ceo Attributes Affect Firm R&D Spending? New Evidence From A Panel Of French Firms," Post-Print hal-00479532, HAL.
  16. Ricart, Joan E. & Alvarez, Jose L. & Gallo, Miguel A., 1998. "Governance mechanisms for effective leadership: The case of Spain," IESE Research Papers D/371, IESE Business School.
  17. Ricart, Joan E. & Corrales, Jose M., 2000. "Managerial appraisal and compensation: The case of Spain," IESE Research Papers D/413, IESE Business School.
  18. Chung, Kee H. & Pruitt, Stephen W., 1996. "Executive ownership, corporate value, and executive compensation: A unifying framework," Journal of Banking & Finance, Elsevier, vol. 20(7), pages 1135-1159, August.

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