A theory of fair CEO pay

Pierre Chaigneau, Alex Edmans and Daniel Gottlieb

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: This paper studies executive pay with fairness concerns: if the CEO's wage falls below a perceived fair share of output, he suffers disutility that is increasing in the discrepancy. Fairness concerns do not always lead to fair wages; instead, the firm threatens the CEO with unfair wages for low output to induce effort. The contract sometimes involves performance-vesting equity: the CEO is paid a constant share of output if it is sufficiently high, and zero otherwise. Even without moral hazard, the contract features pay-for-performance, to address fairness concerns and ensure participation. This rationalizes pay-for-performance even if effort incentives are unnecessary.

Keywords: moral hazard; executive compensation; fairness (search for similar items in EconPapers)
JEL-codes: D86 G32 G34 J33 (search for similar items in EconPapers)
Pages: 19 pages
Date: 2025-09-01
New Economics Papers: this item is included in nep-cfn, nep-hpe, nep-hrm and nep-mic
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Published in American Economic Review: Insights, 1, September, 2025, 7(3), pp. 306 – 324. ISSN: 2640-205X

Downloads: (external link)
http://eprints.lse.ac.uk/125993/ Open access version. (application/pdf)

Related works:
Journal Article: A Theory of Fair CEO Pay (2025)
Working Paper: A Theory of Fair CEO Pay (2023)
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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:125993

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