Implicit Contracts and the Explanatory Power of Top Executive Compensation for Future Performance

Posted: 8 Aug 2000

See all articles by Rachel M. Hayes

Rachel M. Hayes

University of Utah - David Eccles School of Business

Scott Schaefer

University of Utah - Department of Finance

Multiple version iconThere are 2 versions of this paper

Abstract

Recent research suggests that implicit incentive contracts may be based on performance measures that are observable only to the contracting parties. We derive and test implications of this insight for the relationship between executive compensation and firm performance. If corporate boards optimally use both observable and unobservable (to outsiders) measures of executive performance and the unobservable measures are correlated with future firm performance, then unexplained variation in current compensation should predict future variation in firm performance. Further, compensation should be more positively associated with future performance when observable measures are less useful for contracting. Our results are consistent with these hypotheses.

JEL Classification: J41, M41

Suggested Citation

Hayes, Rachel M. and Schaefer, Scott, Implicit Contracts and the Explanatory Power of Top Executive Compensation for Future Performance. Available at SSRN: https://ssrn.com/abstract=228751

Rachel M. Hayes

University of Utah - David Eccles School of Business ( email )

1645 E Campus Center Dr
Salt Lake City, UT 84112-9303
United States

Scott Schaefer (Contact Author)

University of Utah - Department of Finance ( email )

David Eccles School of Business
Salt Lake City, UT 84112
United States

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