Tunnel-Proofing the Executive Suite: Transparency, Temptation, and the Design of Executive Compensation
This paper considers optimal compensation for a CEO who is entrusted with administering corporate assets honestly. Optimal compensation designs maximize integrity at minimum cost. These designs are very "low powered," i.e., while specifying a lower bound for performance and increasing pay with performance, they increase compensation at a rapidly decreasing rate. Thus, integrity considerations engender optimal compensation packages that closely resemble the very pervasive 80/120 bonus plans, exactly the sort of compensation that Jensen (2003) argues should compromise integrity. Under optimal designs, expected compensation increases linearly with firm size, and increases in the market/book ratio. Moreover, given optimal compensation, CEO asset diversion is limited to high market-to-book firms that have received negative productivity shocks. The Author 2009. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please email: journals.permissions@oxfordjournals.org, Oxford University Press.
Year of publication: |
2009
|
---|---|
Authors: | Noe, Thomas H. |
Published in: |
Review of Financial Studies. - Society for Financial Studies - SFS. - Vol. 22.2009, 12, p. 4849-4880
|
Publisher: |
Society for Financial Studies - SFS |
Saved in:
Online Resource
Saved in favorites
Similar items by person
-
Corporate board composition, protocols, and voting behavior: experimental evidence
Gillette, Ann B., (2000)
-
Insider trading and the problem of corporate agency
Noe, Thomas H., (1995)
-
Insider trading, costly monitoring, and managerial incentives
Hu, Jie, (1997)
- More ...