This paper examines CEO pay in the banking industry and the effect of deregulating the market for corporate control. Using panel data on 147 banks over the 1980s we find higher levels of pay in competitive corporate control markets, i.e., those in which interstate banking is permitted. We also find a stronger pay-performance relation in deregulated interstate banking markets. Finally, CEO turnover increases substantially after deregulation. These results provide evidence of a managerial talent market- one which matches the level and structure of pay with the competitiveness of the banking environment.

for financial support from the National Science Foundation (SBER 96-18111). We also thank Robert Cho and Brian Dun for providing some of the Towers Perrin data used in this paper. No confidential data have been used in this paper. Our data can be accessed at

Performance measurement is an essential part of the design of any incentive system. The strength and value of incentives in organizations are strongly affected by the performance measures available. Yet, the characteristics of valuable performance measures have not been well explored in the agency literature. In this paper, I use a multi-task model to develop a two-parameter characterization of performance measures and show how these two parameters—distortion and risk—affect the value and use of performance measures in incentive contracts. I show that many complex issues in the design of real world incentive contracts can be fruitfully viewed as trade-offs between these two features of performance measures. I also use this framework to analyze the provision of incentives in several specific environments, including R&D labs and non-profit organizations.

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The contracting view of CEO pay assumes that pay is used by shareholders to solve an agency problem. Simple models of the contracting view predict that pay should not be tied to luck, where luck is defined as observable shocks to perfor-mance beyond the CEO's control. Using several measures of luck, we find that CEO pay in fact responds as much to a lucky dollar as to a general dollar. A skimming model, where the CEO has captured the pay-setting process, is consis-tent with this fact. Because some complications to the contracting view could also generate pay for luck, we test for skimming directly by examining the effect of governance. Consistent with skimming, we find that better governed firms pay their CEO less for luck. I.

A common view is that there is little correlation between �rm performance and CEO pay. Using a new �fteen-year panel data set of CEOs in the largest, publicly traded U. S. companies, we document a strong relationship between �rm performance and CEO compensation. This relationship is generated almost entirely by changes in the value of CEO holdings of stock and stock options. In addition, we show that both the level of CEO compensation and the sensitivity of compensation to �rm performance have risen dramatically since 1980, largely because of increases in stock option grants. I.

We examine how the use of peer groups and competitive benchmarking influence the structure of executive compensation. We find that the practice of competitive benchmarking is pervasive. Moreover, we find that this practice has an effect on all components of pay. In our sample, CEOs whose pay is below the median pay level of CEOs in firms of similar size and industry receive raises that are twice as large relative to the raises received by CEOs with above median pay. These raises are not only larger in percentage terms, but are also larger in absolute dollar terms and remain even after controlling for economic factors that have previously been documented to affect compensation levels (e.g., performance, size, industry, and firm governance characteristics). Our results suggest that the use of competitive benchmarking contributes to an upward ratcheting of pay levels over time. We conclude that political and Executive compensation has garnered significant attention from both academics and the popular press in recent years. As shown in Figure 1, the compensation levels of

We propose a model in which economic relations and institutions in advanced and less developed countries differ as these societies have access to different amounts of informa-tion. The lack of information in less developed economies makes it hard to evaluate the performance of managers and leads to high “agency costs. ” Differences in the amount of information have a variety of sources. As well as factors related to the informational infras-tructure, we emphasize that societies accumulate information by repeating certain tasks. Poor societies may therefore have less information partly because the scarcity of capital restricts the repetition of various activities. Two implications of our model are (1) as an economy develops and generates more information, it achieves better risk sharing at a given level of effort, but because agents are exerting more effort and the types of activities are changing, the overall level of risk sharing may decline; (2) with development, the share of financial intermediation carried out through market institutions should increase.

Although agency theory suggests that firms ought to index executive compensation to remove market-wide effects (i.e., RPE), there is little evidence to support this theory. Oyer (2004) posits that absence of RPE is optimal if the CEO's reservation wages from outside employment opportunities rise and fall with the economy's fortunes. We directly test and find support for Oyer's (2004) theory. We argue that the CEO's outside opportunities depend on his talent proxied by the CEO's financial press visibility and his firm's recent industry-adjusted ROA. Our results are robust to alternate explanations such as managerial skimming, oligopoly and asymmetric benchmarking.

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