Journal ArticleDOI
Managerial Expertise, Private Information, and Pay-Performance Sensitivity
TLDR
This paper characterizes optimal pay-performance sensitivities of compensation contracts for managers who have private information about their skills, and those skills affect their outside employment opportunities, and identifies plausible circumstances under which risk and incentives are positively associated.Abstract:
This paper characterizes optimal pay-performance sensitivities of compensation contracts for managers who have private information about their skills, and those skills affect their outside employment opportunities. The model presumes that the rate at which a manager's opportunity wage increases in his expertise depends on the nature of that expertise, i.e., whether it is general or firm specific. The analysis demonstrates that when managerial expertise is largely firm specific (general), the optimal pay-performance sensitivity is lower (higher) than its optimal value in a benchmark setting of symmetric information. Furthermore, when managerial skills are largely firm specific (general), the optimal pay-performance sensitivity decreases (increases) as managerial skills become a more important determinant of firm performance. Unlike the standard agency-theoretic prediction of a negative trade-off between risk and pay-performance sensitivity, this paper identifies plausible circumstances under which risk and incentives are positively associated. In addition to providing an explanation for why empirical tests of risk-incentive relationships have produced mixed results, the analysis generates insights that can be useful in guiding future empirical research.read more
Citations
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Journal ArticleDOI
Risk---incentives trade-off and outside options
TL;DR: It is shown that when an increase in the uncertainty amplifies the riskiness of principal's internal project more than the agent’s outside option, a positive risk–incentives relationship can be predicted when the internal project is sufficiently risky.
Journal ArticleDOI
Sorting Effects of Performance Pay
Maris Goldmanis,Korok Ray +1 more
TL;DR: Barth et al. as discussed by the authors examined the dual incentive and sorting effects of performance pay in a simple contracting model of endogenous participation and found that unless the manager is highly risk averse, sorting dampens optimal pay-performance sensitivity PPS because PPS beyond a nominal amount transfers unnecessary information rent to the manager.
Journal ArticleDOI
Career incentive contract design in project management under companies’ competition and asymmetric information
Zhihua Chen,Yanfei Lan,Nana Ma +2 more
TL;DR: An agency problem with two companies competing over a menu of career incentive contracts for a manager, it is confirmed that it is unnecessary to provide career incentives under full information regardless of whether competition exists, and recommendations on mitigating the adverse impacts caused by competition and asymmetric information are provided.
Journal ArticleDOI
Explicit and Implicit Incentives: Longitudinal Evidence from NCAA Football Head Coaches Employment Contracts
Brian D. Cadman,Gavin Cassar +1 more
TL;DR: This article study the role of explicit and implicit incentives in a competitive labor market with no internal promotion opportunities and find that explicit incentives explain only a small fraction of the total incentives, as the likelihood of new employment and renegotiation of current employment on better terms increases following good performance.
Journal ArticleDOI
Pay me a single figure! Assessing the impact of single figure regulation on CEO pay
TL;DR: In this article, the authors examined the relation between quantitative disclosure of CEO pay and the optimality of pay structure in terms of 1) level of pay, 2) pay-performance relationship, and 3) CEO-to-employee pay ratio.
References
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Journal ArticleDOI
Multitask Principal–Agent Analyses: Incentive Contracts, Asset Ownership, and Job Design
Bengt Holmstrom,Paul Milgrom +1 more
TL;DR: In this article, a principal-agent model that can explain why employment is sometimes superior to independent contracting even when there are no productive advantages to specific physical or human capital and no financial market imperfections to limit the agent's borrowings is presented.
Journal ArticleDOI
Performance Pay and Top Management Incentives
Kevin Murphy,Michael C. Jensen +1 more
TL;DR: For example, the authors estimates of the pay-performance relation (including pay, options, stockholdings, and dismissal) for chief executive officers indicate that CEO wealth changes $3.25 for every $1,000 change in shareholder wealth.
Book
Performance pay and top-management incentives
Michael C. Jensen,Kevin Murphy +1 more
TL;DR: For example, the authors estimates of the pay-performance relation (including pay, options, stockholdings, and dismissal) for chief executive officers indicate that CEO wealth changes $3.25 for every $1,000 change in shareholder wealth.
Journal ArticleDOI
A Theory of Incentives in Procurement and Regulation.
TL;DR: A Theory of Incentives in Procurement and Regulation (TIIN) as mentioned in this paper is a popular textbook for regulatory economics, with a particular focus on the regulation of natural monopolies such as military contractors, utility companies and transportation authorities.
Book
A Theory of Incentives in Procurement and Regulation
Jean Tirole,Jean-Jacques Laffont +1 more
TL;DR: A Theory of Incentives in Procurement and Regulation (TIIN) as mentioned in this paper is a popular textbook for regulatory economics, with a particular focus on the regulation of natural monopolies such as military contractors, utility companies and transportation authorities.
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