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Too Much, Too Soon, for Too Long: The Dynamics of Competitive Executive Compensation

Author

Listed:
  • Gilles Chemla

    (Imperial College London, DRM - Dauphine Recherches en Management - Université Paris Dauphine-PSL - PSL - Université Paris Sciences et Lettres - CNRS - Centre National de la Recherche Scientifique)

  • Alejandro Rivera

    (UT Dallas - University of Texas at Dallas [Richardson])

  • Liyan Shi

    (CMU - Carnegie Mellon University [Pittsburgh])

  • Hengji Ai
  • Robert Anderson
  • Patrick Bolton
  • Sylvain Carré
  • Hui Chen
  • Naveen Ghondi
  • Thomas Geelen
  • Denis Gromb
  • Barney Hartman-Glaser
  • Andrei Malenko
  • Nadya Malenko
  • Simon Mayer
  • Ramana Nanda
  • Christine Parlour
  • Facundo Piguillem
  • Yuliy Sannikov
  • Ali Shourideh
  • Toni Whited

Abstract

We examine executive compensation in a general equilibrium model with dynamic moral hazard, where executives' outside options are endogenously determined by equilibrium market compensation. Firms provide incentives through compensation packages featuring deferred payments as "carrots" and termination as "sticks." Crucially, the effectiveness of termination as an incentive device is undermined by the outside options available to executives. As individual firms fail to internalize the effect of their compensation design on these endogenous outside options, the equilibrium is generally inefficient. Compared to the shareholder-value maximizing compensation packages, executives are paid too much, too soon, and keep their jobs for too long.

Suggested Citation

  • Gilles Chemla & Alejandro Rivera & Liyan Shi & Hengji Ai & Robert Anderson & Patrick Bolton & Sylvain Carré & Hui Chen & Naveen Ghondi & Thomas Geelen & Denis Gromb & Barney Hartman-Glaser & Andrei Ma, 2025. "Too Much, Too Soon, for Too Long: The Dynamics of Competitive Executive Compensation ," Post-Print halshs-05550207, HAL.
    • Handle: RePEc:hal:journl:halshs-05550207
    Note: View the original document on HAL open archive server: https://shs.hal.science/halshs-05550207v1
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    JEL classification:

    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • M12 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Personnel Management; Executives; Executive Compensation
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • M12 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Personnel Management; Executives; Executive Compensation

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