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Competition for Managers, Corporate Governance and Incentive Compensation

46 Pages Posted: 19 Mar 2011  

Viral V. Acharya

New York University - Leonard N. Stern School of Business; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER); New York University (NYU) - Department of Finance

Marc Gabarro

University of Mannheim Business School

Paolo F. Volpin

City University London - Faculty of Finance; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)

Multiple version iconThere are 3 versions of this paper

Date Written: February 1, 2011

Abstract

We propose a model in which firms use corporate governance as part of an optimal compensation scheme: better governance incentivizes managers to perform better and thus saves on the cost of providing pay for performance. However, when managerial talent is scarce, firms compete to attract better managers. This reduces an individual firm's incentives to invest in corporate governance because managerial rents are determined by the manager's reservation value when employed elsewhere and thus by other firms' governance. In equilibrium, better managers end up at firms with weaker governance, and conversely, better-governed firms have lower-quality managers. Consistent with these implications, we show empirically that a firm's executive compensation is not chosen in isolation but also depends on other firms' governance and that better managers are matched to firms with weaker corporate governance.

Keywords: corporate governance, executive compensation, externalities

JEL Classification: D82, G21, G18

Suggested Citation

Acharya, Viral V. and Gabarro, Marc and Volpin, Paolo F., Competition for Managers, Corporate Governance and Incentive Compensation (February 1, 2011). AFA 2012 Chicago Meetings Paper. Available at SSRN: https://ssrn.com/abstract=1786703 or http://dx.doi.org/10.2139/ssrn.1786703

Viral V. Acharya

New York University - Leonard N. Stern School of Business ( email )

44 West 4th Street
New York, NY NY 10012
United States

HOME PAGE: http://pages.stern.nyu.edu/~sternfin/vacharya/public_html/~vacharya.htm

Centre for Economic Policy Research (CEPR)

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

New York University (NYU) - Department of Finance

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States

Marc Gabarro (Contact Author)

University of Mannheim Business School ( email )

L9, 1-2
Mannheim, 68131
Germany

Paolo F. Volpin

City University London - Faculty of Finance ( email )

London, EC2Y 8HB
Great Britain

Centre for Economic Policy Research (CEPR)

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

European Corporate Governance Institute (ECGI)

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

HOME PAGE: http:/www.ecgi.org

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