RT Generic
T1 Executive pay with observable decisions
A1 Celentani, Marco
A1 Loveira, Rosa
A1 Ruiz-Verdú, Pablo
AB We propose a model of delegated expertise designed to analyze executivecompensation. An expert has to pick one of two possible decisions. By exertingeffort the expert can obtain private information on these decisions. The expert’sdecision and its ultimate performance realization are publicly observed, but the expert’sinformation is not. In other words, the principal observes the expert’s decisionand its realization, but does not know whether the expert expended effort to obtaininformation and whether he made an efficient decision conditional on the informationhe received. We characterize the optimal compensation contract among those thatgive the expert incentives to obtain information to determine the efficient decisionand to make the decision that is efficient contingent on the obtained information.We show that: 1) It is generically optimal to make pay contingent on the decisionmade by the expert, not only on performance; 2) The expert is often rewarded forchoosing alternatives that are ex-ante inefficient. 3) When decisions differ in theircomplexity, optimal pay-performance may be zero if the expert chooses the complexalternative. Our model highlights novel factors that should be considered inthe design of executive compensation contracts, sheds light on existing compensationpractices, such as rewarding executives for acquisitions, and suggests mechanisms topromote managerial innovation.
PB Fundación de Estudios de Economía Aplicada
SN 1696-750X
YR 2010
FD 2010
LK https://hdl.handle.net/10016/12715
UL https://hdl.handle.net/10016/12715
LA eng
NO We gratefully acknowledge the financial support of FEDEA and the Spanish Ministry of Innovation andScience for financial support under grant SEJ2008-03516. Rosa Loveira gratefully acknowledges the financialsupport of Xunta de Galicia (Spain) under the Isidro Parga Pondal research grant. We thank seminar participantsat Universidad Carlos III, Universidade de Vigo, Econometric Society European Meeting 2007, 2nd EuropeanReward Management Conference 2009, EASSET 2009, EARIE 2010 and Jornadas de Economía Industrial 2010for useful discussions and suggestions.
DS e-Archivo
RD 1 sept. 2024