Advanced Search
MyIDEAS: Login to save this paper or follow this series

Career Concerns And Contingent Compensation

Contents:

Author Info

  • Guillermo Caruana

    ()

  • Marco Celentani

    ()

Abstract

This paper considers a two-period model in which managers have superior information about their ability to forecast the realization of given investment projects. Firms compete for managers by offering short-run contracts. As future salaries depend on current play through its impact on managerial reputation, managers' investment decisions are affected by their concern for their future careers. We analyze the interaction between these implicit incentives, created by managers' career concerns, and the explicit incentives made possible by contingent compensation. We show that managers' career concerns create perverse incentives that are robust to the introduction of contingent contracting. We also find that while managerial compensation is monotonically increasing in profit at date 2, it is not at date 1. Two numerical exercises relate the implications of our results to the literature on the link between pay and performance. In line with empirical findings, we find that: i) the pay-performance sensitivity is highest in the final period of managers' employment; ii) higher pay-performance sensitivities are associated with a lower variance of profits.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://docubib.uc3m.es/WORKINGPAPERS/WE/we014811.pdf
Download Restriction: no

Bibliographic Info

Paper provided by Universidad Carlos III, Departamento de Economía in its series Economics Working Papers with number we014811.

as in new window
Length:
Date of creation: Oct 2001
Date of revision:
Handle: RePEc:cte:werepe:we014811

Contact details of provider:
Postal: C./ Madrid, 126, 28903 Getafe (Madrid)
Phone: +34-91 6249594
Fax: +34-91 6249329
Email:
Web page: http://www.eco.uc3m.es
More information through EDIRC

Related research

Keywords:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Hirshleifer, David & Thakor, Anjan V, 1992. "Managerial Conservatism, Project Choice, and Debt," Review of Financial Studies, Society for Financial Studies, vol. 5(3), pages 437-70.
  2. Ricart I Costa, Joan E., 1989. "On managerial contracting with asymmetric information," European Economic Review, Elsevier, vol. 33(9), pages 1805-1829, December.
  3. Scharfstein, David S & Stein, Jeremy C, 1990. "Herd Behavior and Investment," American Economic Review, American Economic Association, vol. 80(3), pages 465-79, June.
  4. Murphy, Kevin J., 1999. "Executive compensation," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 38, pages 2485-2563 Elsevier.
  5. Douglas W. Diamond, 1998. "Reputation Acquisition in Debt Markets," Levine's Working Paper Archive 602, David K. Levine.
  6. Dewatripont, Mathias & Jewitt, Ian & Tirole, Jean, 1999. "The Economics of Career Concerns, Part II: Application to Missions and Accountability of Government Agencies," Review of Economic Studies, Wiley Blackwell, vol. 66(1), pages 199-217, January.
  7. Murphy, K.J. & Gibbons, R., 1990. "Optimal Incentive Contracts in the Presence of Career Concerns : Theory and Evidence," Papers 90-09, Rochester, Business - Managerial Economics Research Center.
  8. Fama, Eugene F, 1980. "Agency Problems and the Theory of the Firm," Journal of Political Economy, University of Chicago Press, vol. 88(2), pages 288-307, April.
  9. Maskin, Eric & Tirole, Jean, 1992. "The Principal-Agent Relationship with an Informed Principal, II: Common Values," Econometrica, Econometric Society, vol. 60(1), pages 1-42, January.
  10. Stephen Morris, 2001. "Political Correctness," Journal of Political Economy, University of Chicago Press, vol. 109(2), pages 231-265, April.
  11. Holmstrom, Bengt & Milgrom, Paul, 1987. "Aggregation and Linearity in the Provision of Intertemporal Incentives," Econometrica, Econometric Society, vol. 55(2), pages 303-28, March.
  12. Prendergast, Canice & Stole, Lars, 1996. "Impetuous Youngsters and Jaded Old-Timers: Acquiring a Reputation for Learning," Journal of Political Economy, University of Chicago Press, vol. 104(6), pages 1105-34, December.
  13. Rajesh K. Aggarwal & Andrew A. Samwick, 1999. "The Other Side of the Trade-off: The Impact of Risk on Executive Compensation," Journal of Political Economy, University of Chicago Press, vol. 107(1), pages 65-105, February.
  14. Meyer, Margaret A & Vickers, John, 1997. "Performance Comparisons and Dynamic Incentives," Journal of Political Economy, University of Chicago Press, vol. 105(3), pages 547-81, June.
  15. Prendergast, Canice, 1993. "A Theory of "Yes Men."," American Economic Review, American Economic Association, vol. 83(4), pages 757-70, September.
  16. Holmstrom, Bengt & Ricart i Costa, Joan, 1986. "Managerial Incentives and Capital Management," The Quarterly Journal of Economics, MIT Press, vol. 101(4), pages 835-60, November.
  17. Dewatripont, Mathias & Jewitt, Ian & Tirole, Jean, 1999. "The Economics of Career Concerns, Part I: Comparing Information Structures," Review of Economic Studies, Wiley Blackwell, vol. 66(1), pages 183-98, January.
  18. Ricart i Costa, Joan E, 1988. "Managerial Task Assignment and Promotions," Econometrica, Econometric Society, vol. 56(2), pages 449-66, March.
  19. Jeon, Seonghoon, 1998. "Reputational concerns and managerial incentives in investment decisions," European Economic Review, Elsevier, vol. 42(7), pages 1203-1219, July.
  20. Zwiebel, Jeffrey, 1995. "Corporate Conservatism and Relative Compensation," Journal of Political Economy, University of Chicago Press, vol. 103(1), pages 1-25, February.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Abel Elizalde & Rafael Repullo, 2004. "Economic And Regulatory Capital. What Is The Difference?," Working Papers wp2004_0422, CEMFI.
  2. Marco Celentani & Rosa Loveira & Pablo Ruiz-Verdú, 2010. "Executive Pay with Observable Decisions," Working Papers 2010-29, FEDEA.
  3. Manuel Santos & Jorge Aseff, . "Stock Options and Managerial Optimal Contracts," Working Papers 2133304, Department of Economics, W. P. Carey School of Business, Arizona State University.
  4. Josep Pijoan-Mas, 2004. "Precautionary Savings or Working Longer Hours?," 2004 Meeting Papers 350, Society for Economic Dynamics.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:cte:werepe:we014811. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ().

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.