The Effect of Monitoring on CEO Pay Practices in a Matching Equilibrium
HEC Montreal - Institute of Applied Economics
November 25, 2013
Paris December 2011 Finance Meeting EUROFIDAI - AFFI
We present a model of efficient contracting with endogenous matching and limited monitoring in which firms compete for CEOs. The model explains the association between limited monitoring and CEO pay practices such as pay-for-luck, high salaries, a low pay-performance sensitivity, and a more asymmetric pay-for-performance relation. The results are driven by the matching process: a firm with a better capacity for monitoring can better handle the downside risk of hiring a CEO with more uncertain ability. In equilibrium, each firm designs a compensation contract to attract and retain a particular type of CEO.
Number of Pages in PDF File: 38
Keywords: CEO pay, corporate governance, matching, monitoring, pay-for-luck
JEL Classification: D86, G34, M12working papers series
Date posted: October 14, 2011 ; Last revised: November 27, 2013
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