We examine the distribution of incentives across executives with explicit divisional responsibilities, those with broad oversight authority over the firm, and CEOs. Oversight executives have pay-performance incentives that are $1.22 per thousand dollar increase in shareholder wealth higher than those of divisional executives. For CEOs, incentives are $5.65 per thousand higher than for executives with divisional responsibility. The aggregate pay-firm performance sensitivity of the top management team is substantial, at $32.32 per thousand for the median firm. CEO incentives are 42 to 58 percent of the aggregate incentives to the top management team. We match a subset of our divisional executives to the divisions they manage. We document a positive pay-divisional performance sensitivity and show that it is increasing in the precision of the divisional performance measure. The pay-firm performance sensitivity for divisional executives is decreasing in the precision of their divisional performance measure. These results are consistent with a principal-agent model with multiple signals of managerial effort.

This paper studies how firms tie CEO compensation to firms' stock market performance. I demonstrate that in theory and in practice there is a tradeo# between giving CEOs incentives and forcing them to hold an un-diversified position in the firm. Unlike the results of the existing literature, market risk is not necessarily a cost of providing incentives. The cost of giving incentives is the potential loss of diversification for the CEO. As a result, CEO incentive decreases with firm-specific risk, but may not decrease with market risk. In performing the empirical tests, I also incorporate the recent critique by Prendergast (2000), which argues that the relation between risk and incentive level is unreliably estimated when we fail to consider the effect of risk on the benefit of giving incentives. I study both sides of the incentive-diversification tradeoff simultaneously. I am able to show that after controlling for the other side of the tradeoff, incentive increases with the CEOs' ability to affect firm value, and decreases with the firm-specific risk level of the firm.

Abstract not found

Dissatisfaction with traditional accounting-based performance measures has spawned a number of alternatives, of which Economic Value Added (EVA) is currently the most prominent. How can we tell which performance measures best capture managerial contributions to value? There is currently a heated debate among practitioners as to whether the new performance measures have a higher correlation with stock values and their returns than do traditional accounting earnings. Academic researchers have instead relied on the variance of performance measures to gauge their relative accuracy. To formally address the above debate, we use a relatively standard principal-agent model in which contracts can be based on any two accounting-based performance measures plus the stock price. Rather than model detailed differences between EVA and traditional measures such as earnings, we focus on the problem that while the variability of each measure is observable, their

this paper, weinvestigate the relevance of these two views.

This paper seeks to answer two questions: in models of executive compensation how important is hidden information relative to moral hazard, and how biased are empirical measures of moral hazard in econometric models that do not account for hidden information. An analytical stage of this paper exploit restrictions from the theory of optimal contracting to identify hidden information and di¤erentiate its e¤ects from moral hazard. An empirical stage uses and develops nonparametric and numerical methods to quantify the importance of the various factors identi…ed in the …rst stage using a large longitudinal data set on executives. 1

We provide evidence on the match between …rms, managers and incentives using a new survey designed for this purpose. The survey contains information on a sample of executives’risk preferences and human capital, on the explicit and implicit incentives they face and on the …rms they work for. We model a market for managerial talent where both …rms and managers are heterogeneous. Following the sources of heterogeneity observed in the data, we assume that …rms di¤er by ownership structure and that family …rms, though caring about pro…ts, put relatively more weight on bene…ts of direct control than non-family …rms. Managers di¤er in their degree of risk aversion and talent. The entry of …rms and managers, the choice of managerial compensation schemes and the manager-…rm matching are all endogenous. The model yields predictions on several equilibrium correlations that …nd support in our data: (i) Family …rms use managerial contracts that are less sensitive to performance, both explicitly through bonus pay and implicitly through career development; (ii) More talented and risk-tolerant managers are matched with …rms that o¤er steeper contracts. (iii) Managers who face steeper contracts work harder, earn more and display higher job satisfaction. Alternative explanations may account for some of these correlations but not for all of them jointly.

Little evidence exists that ¢rms index executive compensation to remove the in£uence of marketwide factors. We argue that executives can, in principle, replicate such indexation in their private portfolios. In support, we ¢nd that market risk has little e¡ect on the use of stock-based pay for the average executive. But executives’ability to ‘‘undo’’excessive market risk can be hindered by wealth constraints and inalienability of human capital.We replicate the standard result that there is little relative performance evaluation (RPE) for the average executive, but ¢nd strong evidence of RPE for younger executives and executives with less ¢nancial wealth. RESEARCHERS ARE STARTING TO MAKE SENSE of executive compensation. While there still exists controversy about whether the link between executive compensation and stock market value is su⁄ciently strong, there is no doubt that the link exists, on average, and has become stronger over time (see Jensen and Murphy (1990), Haubrich (1994), and Hall and Liebman (1998)). There is also ample evidence of

This paper considers a two-period model in which managers have superior information about their ability to forecast the realization of given investment projects. Firms compete for managers by offering short-run contracts. As future salaries depend on current play through its impact on managerial reputation, managers' investment decisions are affected by their concern for their future careers. We analyze the interaction between these implicit incentives, created by managers ' career concerns, and the explicit incentives made possible by contingent compensation. We show that managers ' career concerns create perverse incentives that are robust to the introduction of contingent contracting. We also find that while managerial compensation is monotonically increasing in profit at date 2, it is not at date 1. Two numerical exercises relate the implications of our results to the literature on the link between pay and performance. In line with empirical findings, we find that: i) the pay-performance sensitivity is highest in the final period of managers' employment; ii) higher pay-performance sensitivities are associated with a lower variance of profits.

I consider two seemingly unrelated puzzles; 1.Why is relative performance evaluation (RPE) used less in CEO compensation than agency theory suggests? 2.Why is sometimes, e.g., for fund managers, a mediocre performance more highly rewarded than excellence? I consider a simple tournament model, where agents can in‡uence the spread of output in addition to its mean. I show that standard tournament rewards induce risky and lazy behavior from the agents. This …nding sheds light on Puzzle 1. Second, I consider a scheme that ranks agents according to their relative closeness to a benchmark k. I show that there exists intermediate values of k such that the risky-lazy problem of the standard tournament can be mitigated. This result sheds light on Puzzle 2.