Risk Aversion, Performance Pay, and the Principal-Agent Problem
AbstractThis paper calculates numerical solutions to the principal-agent problem and compares the results to the stylized facts of CEO compensation. The numerical predictions come from parameterizing the models of Sanford J. Grossman and Oliver D. Hart (1983) and of Bengt Holmstrom and Paul Milgrom (1987). While the correct incentives for a CEO can greatly enhance a firm's performance, providing such incentives need not be expensive. For many parameter values, CEO compensation need increase only by about $10 for every $1,000 of additional shareholder value; for some values, the amount is 0.003 cents. Copyright 1994 by University of Chicago Press.
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Bibliographic InfoArticle provided by University of Chicago Press in its journal Journal of Political Economy.
Volume (Year): 102 (1994)
Issue (Month): 2 (April)
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Web page: http://www.journals.uchicago.edu/JPE/
Other versions of this item:
- Joseph G. Haubrich, 1991. "Risk aversion, performance pay, and the principal-agent problem," Working Paper 9118, Federal Reserve Bank of Cleveland.
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