Industry Structure, Executive Pay, and Short-Termism
John E. Thanassoulis
University of Oxford - Department of Economics
May 31, 2012
Forthcoming, Management Science.
This study outlines a new theory linking industry structure to optimal employment contracts and executive short-termism. Firms hire their executives using optimal contracts derived within a competitive labour market. To motivate effort firms must use some variable remuneration. Such remuneration introduces a myopia problem: an executive would wish to inflate early expected earnings at some risk to future profits. To manage this short-termism some bonus pay is deferred. Convergence in size amongst firms makes the cost of managing the myopia problem grow faster than the cost of managing the effort problem. Eventually the optimal contract jumps from one deterring myopia to one tolerating myopia. Under some conditions the industry partitions: the largest firms hire executives on contracts tolerant of myopia, smaller firms ensure myopia is ruled out.
Number of Pages in PDF File: 30
Keywords: myopia, moral hazard, compensation, bonuses, bankers' pay, deferred pay, vested pay
JEL Classification: L14, G34, G21Accepted Paper Series
Date posted: June 2, 2012 ; Last revised: July 17, 2012
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