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The effect of monitoring on CEO pay practices in a matching equilibrium

Listed author(s):
  • Pierre Chaigneau
  • Nicolas Sahuguet

We present a model of efficient contracting with endogenous matching and limited monitoring in which firms compete for CEOs. The model explains the association between limited monitoring and CEO pay practices such as pay-for-luck, high salaries, a low pay-performance sensitivity, and a more asymmetric pay-for-performance relation. The results are driven by the matching equilibrium: firms with different capacities for monitoring hire different types of CEOs and offer different compensation contracts. The model thus responds to some fundamental arguments of the managerial power perspective.

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File URL: http://eprints.lse.ac.uk/55405/
File Function: Open access version.
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Paper provided by London School of Economics and Political Science, LSE Library in its series LSE Research Online Documents on Economics with number 55405.

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Length: 40 pages
Date of creation: Nov 2013
Handle: RePEc:ehl:lserod:55405
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