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A theory of fair CEO pay

Author

Listed:
  • Chaigneau, Pierre
  • Edmans, Alex
  • Gottlieb, Daniel

Abstract

This paper studies executive pay with fairness concerns: if the CEO's wage falls below a perceived fair share of output, he suffers disutility that is increasing in the discrepancy. Fairness concerns do not always lead to fair wages; instead, the firm threatens the CEO with unfair wages for low output to induce effort. The contract sometimes involves performance-vesting equity: the CEO is paid a constant share of output if it is sufficiently high, and zero otherwise. Even without moral hazard, the contract features pay-for-performance, to address fairness concerns and ensure participation. This rationalizes pay-for-performance even if effort incentives are unnecessary.

Suggested Citation

  • Chaigneau, Pierre & Edmans, Alex & Gottlieb, Daniel, 2025. "A theory of fair CEO pay," LSE Research Online Documents on Economics 125993, London School of Economics and Political Science, LSE Library.
    • Handle: RePEc:ehl:lserod:125993
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    File URL: https://researchonline.lse.ac.uk/id/eprint/125993/
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    References listed on IDEAS

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    1. Ernst Fehr & Lorenz Goette & Christian Zehnder, 2009. "A Behavioral Account of the Labor Market: The Role of Fairness Concerns," Annual Review of Economics, Annual Reviews, vol. 1(1), pages 355-384, May.
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    Keywords

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    JEL classification:

    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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