IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this paper or follow this series

Pay-for-Luck in CEO Compensation: Matching and Efficient Contracting

  • Pierre Chaigneau
  • Nicolas Sahuguet

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.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://www.cirpee.org/fileadmin/documents/Cahiers_2012/CIRPEE12-24.pdf
Download Restriction: no

Paper provided by CIRPEE in its series Cahiers de recherche with number 1224.

as
in new window

Length:
Date of creation: 2012
Date of revision:
Handle: RePEc:lvl:lacicr:1224
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.:

as in new window
  1. Jonathan Thomas & Tim Worrall, 1988. "Self-Enforcing Wage Contracts," Review of Economic Studies, Oxford University Press, vol. 55(4), pages 541-554.
  2. 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.
  3. Xavier Gabaix & Augustin Landier, 2006. "Why Has CEO Pay Increased So Much?," 2006 Meeting Papers 518, Society for Economic Dynamics.
  4. 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.
  5. 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.
  6. 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.
  7. Bengt Holmstrom, 1979. "Moral Hazard and Observability," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 74-91, Spring.
  8. 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.
  9. Fabio Feriozzi, 2011. "Paying for observable luck," RAND Journal of Economics, RAND Corporation, vol. 42(2), pages 387-415, 06.
  10. Jonathan Thomas & Tim Worrall, 1988. "Self-Enforcing Wage Contracts," Review of Economic Studies, Oxford University Press, vol. 55(4), pages 541-554.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

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 you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.