Pay-for-(Persistent)-Luck: CEO Bonuses Under Relational and Formal Contracting

Jed DeVaro, Jin-Hyuk Kim and Nick Vikander
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Jin-Hyuk Kim: University of Colorado at Boulder

No 14-13, Discussion Papers from University of Copenhagen. Department of Economics

Abstract: This study investigates the structure of optimal incentives in a stochastic environment and provides evidence for the use of self-enforcing relational contracts. We show theoretically that under relational contracting, firms can credibly promise chief executive officers (CEOs) larger bonuses in good states than in bad, in a way that depends crucially on the state's persistence and the firm's discount factor. Formal contracting instead implies the same bonus in both states. Estimating an empirical model using ExecuComp data, we find that CEO annual bonuses are related to "luck" in a manner consistent with relational contracting.

Keywords: relational contracts; CEO compensation; pay-for-luck (search for similar items in EconPapers)
JEL-codes: C73 D86 J41 (search for similar items in EconPapers)
Pages: 48 pages
Date: 2014-04-08
New Economics Papers: this item is included in nep-bec, nep-cta and nep-hrm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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