Too Much, Too Soon, for Too Long: The Dynamics of Competitive Executive Compensation

Gilles Chemla, Alejandro Rivera and Liyan Shi

No 19613, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: We examine executive compensation in a general equilibrium model with dynamic moral hazard, where executives' outside options are endogenously determined by equilibrium market compensation. Firms provide incentives through compensation packages featuring deferred payments as "carrots" and termination as "sticks." Crucially, the effectiveness of termination as an incentive device is undermined by the outside options available to executives. As individual firms fail to internalize the effect of their compensation design on these endogenous outside options, the equilibrium is generally inefficient. Compared to the shareholder-value maximizing compensation packages, executives are paid too much, too soon, and keep their jobs for too long.

JEL-codes: D86 G32 G34 M12 (search for similar items in EconPapers)
Date: 2024-10
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