We study how competition for talent affects CEO compensation, taking into consideration that CEO decisions and CEO skills or talent are not observable, and CEOs can manipulate performance as measured by outsiders. Firms compete by offering contracts that generate rents for the CEO. We derive the...

This paper studies optimal CEO contracts when managers manipulate their performance measure, sometimes at the expense of firm value. Optimal contracts defer compensation. The manager's incentives vest over time at an increasing rate, and compensation becomes increasingly sensitive to short-term...