A Theory of Fair CEO Pay

Pierre Chaigneau, Alex Edmans and Daniel Gottlieb

American Economic Review: Insights, 2025, vol. 7, issue 3, 306-24

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.

JEL-codes: D63 D82 D86 G34 M12 M52 (search for similar items in EconPapers)
Date: 2025
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DOI: 10.1257/aeri.20240332

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