Review of Financial Studies Vol. 22 No. 12 2009
Tunnel-Proofing the Executive Suite: Transparency, Temptation, and the Design of Executive Compensation
Abstract
[This paper considers optimal compensation for a CEO who is entrusted with administering corporate assets honestly. Optimal compensation designs maximize integrity at minimum cost. These designs are very "low powered," i. e., while specifying a lower bound for performance and increasing pay with performance, they increase compensation at a rapidly decreasing rate. Thus, integrity considerations engender optimal compensation packages that closely resemble the very pervasive 80/120 bonus plans, exactly the sort of compensation that Jensen (2003) argues should compromise integrity. Under optimal designs, expected compensation increases linearly with firm size, and increases in the market/book ratio. Moreover, given optimal compensation, CEO asset diversion is limited to high marketto-book firms that have received negative productivity shocks.]
- Volume
- 22
- Issue
- 12
- Pages
- 4849-4880
- Sources
- bibtex:phds-export.bib