The empirical literature on executive compensation generally fails to specify a model of executive pay on which to base and test hypotheses regarding its determinants. In contrast, this paper analyzes a simple principal-agent model to determine how well it explains variations in CEO incentive pay and salaries. Many findings are consistent with the basic intuition of principal-agent models that compensation is structured to trade off incentives with insurance. However, statistical significance for some of the effects is weak, although the magnitudes are large. Also, there is little evidence of the use of relative performance pay. Nevertheless, while puzzles remain, it seems clear that principal-agent considerations play a role in setting executive compensation.

The essence of selection bias is that we do not observe nonoptimal choices. This applies whether the choice variable is discrete or continuous. This paper extends the selection bias methodology to the case where the choice variable is continuous and the choice set is ordered. The leading practical application of this analysis is the schooling choice problem. Schooling is treated as a continuous choice variable and selectivity corrected rates of return are estimated. The findings suggest selectivity is of considerable importance and support the comparative advantage hypothesis of Willis and Rosen [18].

Those with greater earnings capacity are likely to choose safer jobs, assuming safety is a normal good. Those who e xperience greater returns to job may choose riskier jobs. This paper estimates wage premia for risk of fatality and injury, allowing unobs ervables to affect earnings capacity and the returns to risk. As the endogeneity of job risk causes bias in OLS estimation, the model is e stimated with simultaneous equations and modified selection bias tech niques. The results indicate that unobserved heterogeneity in the ret urns to risk is important and that OLS underestimates the wage premia for fatality and injury risk. Copyright 1988 by MIT Press.

The empirical literature on executive compensation generally fails to specify a model of executive pay on which to base and test hypotheses regarding its determinants. In contrast, this paper analyzes a simple principal-agent model to determine how well it explains variations in CEO incentive pay and salaries. Many findings are consistent with the basic intuition of principal-agent models that compensation is structured to trade off incentives with insurance. However, statistical significance for some of the effects is weak, although the magnitudes are large. Also, there is little evidence of the use of relative performance pay. Nevertheless, while puzzles remain, it seems clear that principal-agent considerations play a role in setting executive compensation.

This study examines the firm's equity ownership by insiders and blockholders starting right after the firm goes public, its decline thereafter, and what alters the decline. Previous literature has shown the incentive of insiders to let their ownership fall after their initial public offering (IPO). After the IPO, management attains only a fraction of the benefits of good governance, so has an incentive to let inside ownership erode. We verify this, but examine the effect that re-entry into capital market via a seasoned equity offering (SEO) has on insider ownership. The incentive of management to hold stock is restored by a desire to raise additional capital because it implicitly raises management's stake. We show empirically that it raises insider stockholding relative to what it otherwise would have been, thus providing an avenue by which this aspect of corporate governance is improved. This, and other results, is shown with a sample of IPO firms during 1996 and 1997. Our findings indicate that, in expectation, the increased holdings due to re-entry into the capital market almost exactly offsets 1 year's downward trend in management shareholdings. Also, we find an interesting interplay between types of blockholders in that CEOs tend to hold less stock after the IPO if external blockholders initially hold more.