Crowding Theory and Executive Compensation

USC CLEO Research Papers Series No. C11-10

26 Pages Posted: 25 Aug 2011 Last revised: 12 Nov 2013

See all articles by Nina Walton

Nina Walton

University of Southern California

Date Written: August 24, 2011

Abstract

Payment for performance is widely embraced as a key component of any well-designed executive compensation package. There is a price to be paid however, from the heavy reliance on incentives as a way to control agent behavior. In particular, evidence exists demonstrating that incentives can crowd out an agent’s social preferences towards her principal. Social preferences are pro-social tendencies of people to do things for others for reasons such as fairness, reciprocity, altruism, and ethical or moral beliefs. The use of incentives in compensation can result in self-interested agents. When crowding out occurs, in order to elicit the desired level of performance, principals may need to increase the level of incentive employed. Crowding out therefore provides an additional account for rising levels of executive compensation.

Suggested Citation

Walton, Nina, Crowding Theory and Executive Compensation (August 24, 2011). USC CLEO Research Papers Series No. C11-10, Available at SSRN: https://ssrn.com/abstract=1916218

Nina Walton (Contact Author)

University of Southern California ( email )

699 Exposition Boulevard
Los Angeles, CA 90089
United States

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