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Pay-for-(Persistent)-Luck: CEO Bonuses Under Relational and Formal Contracting

Author Info

Listed author(s):
  • Jed DeVaro

    (California State University)

  • Jin-Hyuk Kim

    (University of Colorado at Boulder)

  • Nick Vikander

    (Department of Economics, Copenhagen University)

Abstract

This study investigates the structure of optimal incentives in a stochastic environment and provides evidence for the use of self-enforcing relational contracts. We show theoretically that under relational contracting, firms can credibly promise chief executive officers (CEOs) larger bonuses in good states than in bad, in a way that depends crucially on the state's persistence and the firm's discount factor. Formal contracting instead implies the same bonus in both states. Estimating an empirical model using ExecuComp data, we find that CEO annual bonuses are related to "luck" in a manner consistent with relational contracting.

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File URL: http://www.econ.ku.dk/english/research/publications/wp/dp_2014/1413.pdf
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Paper provided by University of Copenhagen. Department of Economics in its series Discussion Papers with number 14-13.

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Length: 48 pages
Date of creation: 08 Apr 2014
Handle: RePEc:kud:kuiedp:1413
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Keywords: relational contracts; CEO compensation; pay-for-luck;

Find related papers by JEL classification:

  • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
  • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
  • J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts

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  18. Lucian Arye Bebchuk & Jesse M. Fried, 2003. "Executive Compensation as an Agency Problem," Journal of Economic Perspectives, American Economic Association, vol. 17(3), pages 71-92, Summer.
  19. Ricard Gil & Justin Marion, 2013. "Self-Enforcing Agreements and Relational Contracting: Evidence from California Highway Procurement," Journal of Law, Economics and Organization, Oxford University Press, vol. 29(2), pages 239-277, April.
  20. Marianne Bertrand & Sendhil Mullainathan, 2001. "Are CEOs Rewarded for Luck? The Ones Without Principals Are," The Quarterly Journal of Economics, Oxford University Press, vol. 116(3), pages 901-932.
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Cited by:

  1. Ricard Gil & Giorgio Zanarone, 2016. "New Frontiers in Empirical Research on Informal Contracting," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 172(2), pages 390-407, June.

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