Noe, Thomas (2009) Tunnel-proofing the executive suite: transparency, temptation, and the design of executive compensation. The Review of Financial Studies, 22 (12). pp. 4849-4880.
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 market-to-book firms that have received negative productivity shocks.
|Keywords:||executive compensation; labour economics|
|Centre:||Faculty of Finance|
|Date Deposited:||07 Nov 2011 16:25|
|Last Modified:||23 Oct 2015 14:06|
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