Strategic Flexibility and the Optimality of Pay for Luck
While standard contract theory suggests that a manager should be paid relative to a bench- mark that removes the effects of forces beyond her control (i.e., luck), there is overwhelming evidence that CEO pay is strongly and positively related to luck. In this paper, we offer an explanation as to why the observed pay for luck can be optimal. We provide a simple model of CEO pay in an environment where the executive is charged with selecting and implementing the firms strategy. For our purposes, strategy is interpreted as the choice of magnitude of the firms exposure to sector or market factors. The idea we have in mind is that a firms realized exposure to sector/market performance is at least partially under the CEOs control and not permanently fixed. Thus, a CEO needs to be incentivized to opti- mally choose her firms exposure to sector forces. As a result, pay contracts will be both positively related to sector performance, and in some situations asymmetrically related to sector upswings and downswings. We find strong empirical support for our model.
国际会议
大连
英文
1-32
2008-07-02（万方平台首次上网日期，不代表论文的发表时间）