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

Gilles Chemla, Alejandro Rivera, Liyan Shi, Hengji Ai, Robert Anderson, Patrick Bolton, Sylvain Carré, Hui Chen, Naveen Ghondi, Thomas Geelen, Denis Gromb, Barney Hartman-Glaser, Andrei Malenko, Nadya Malenko, Simon Mayer, Ramana Nanda, Christine Parlour, Facundo Piguillem, Yuliy Sannikov, Ali Shourideh and Toni Whited
Additional contact information
Gilles Chemla: Imperial College London, DRM - Dauphine Recherches en Management - Université Paris Dauphine-PSL - PSL - Université Paris Sciences et Lettres - CNRS - Centre National de la Recherche Scientifique
Alejandro Rivera: UT Dallas - University of Texas at Dallas [Richardson]
Liyan Shi: CMU - Carnegie Mellon University [Pittsburgh]

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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.

Keywords: general equilibrium; endogenous outside options; contracting externalities. JEL codes: D86; G34; G32; M12; dynamic moral hazard; executive compensation; executive compensation dynamic moral hazard general equilibrium endogenous outside options contracting externalities. JEL codes: D86 G34 G32 M12 (search for similar items in EconPapers)
Date: 2025-10
Note: View the original document on HAL open archive server: https://shs.hal.science/halshs-05550207v1
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Published in Journal of Finance, 2025

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