Pay-for-Luck in CEO Compensation: Matching and Efficient Contracting
We develop a stylized model of efficient contracting with matching between firms and managers with state-contingent reservation utility. We show that the optimal contract is designed to retain and insure the manager. The retention motive explains pay-for-luck in executive compensation, while the insurance feature explains asymmetric pay-for-luck. This contract can be implemented with call options based on a single performance measure which generally does not filter out luck. When costs of involuntary managerial turnover differ across firms, and the abilities of different managers are more or less precisely estimated ex-ante, the model can also explain the observed association between pay-for-luck and bad corporate governance.
|Date of creation:||2012|
|Date of revision:|
|Contact details of provider:|| Postal: CP 8888, succursale Centre-Ville, Montréal, QC H3C 3P8|
Phone: (514) 987-8161
Web page: http://www.cirpee.org/
More information through EDIRC
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.:
- Patrick Legros & Andrew F. Newman, 2003.
"Beauty is a Beast, Frog is a Prince: Assortative Matching with Nontransferabilities,"
Economics Working Papers
0030, Institute for Advanced Study, School of Social Science.
- Patrick Legros & Andrew F. Newman, 2007. "Beauty Is a Beast, Frog Is a Prince: Assortative Matching with Nontransferabilities," Econometrica, Econometric Society, vol. 75(4), pages 1073-1102, 07.
- Patrick Legros & Andrew F. Newman, 2002. "Beauty is a Beast, Frog is a Prince: Assortative Matching with Nontransferabilities," Boston University - Department of Economics - The Institute for Economic Development Working Papers Series dp-149, Boston University - Department of Economics, revised Nov 2004.
- Xavier Gabaix & Augustin Landier, 2008.
"Why has CEO Pay Increased So Much?,"
The Quarterly Journal of Economics,
Oxford University Press, vol. 123(1), pages 49-100.
- 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.
- Fabio Feriozzi, 2011. "Paying for observable luck," RAND Journal of Economics, RAND Corporation, vol. 42(2), pages 387-415, 06.
- Maug, Ernst & Dittmann, Ingolf, 2007. "Lower Salaries and No Options: The Optimal Structure of Executive Pay," Sonderforschungsbereich 504 Publications 07-41, Sonderforschungsbereich 504, Universität Mannheim;Sonderforschungsbereich 504, University of Mannheim.
- Jonathan Thomas & Tim Worrall, 1988. "Self-Enforcing Wage Contracts," Review of Economic Studies, Oxford University Press, vol. 55(4), pages 541-554.
- Maug, Ernst & Dittmann, Ingolf, 2007.
"Lower salaries and no options : the optimal structure of executive pay
[Lower salaries and no options? On the optimal structure of executive pay]," Papers 07-41, Sonderforschungsbreich 504.
- Bengt Holmstrom, 1997.
"Moral Hazard and Observability,"
Levine's Working Paper Archive
1205, David K. Levine.
- Ingolf Dittmann & Ernst Maug & Oliver Spalt, 2010. "Sticks or Carrots? Optimal CEO Compensation when Managers Are Loss Averse," Journal of Finance, American Finance Association, vol. 65(6), pages 2015-2050, December.
When requesting a correction, please mention this item's handle: RePEc:lvl:lacicr:1224. 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: (Manuel Paradis)
If references are entirely missing, you can add them using this form.