Are Top Management Teams Compensated as Teams? A Structural Modeling Approach

46 Pages Posted: 22 Feb 2018 Last revised: 16 Feb 2021

See all articles by Chen Li

Chen Li

New York University (NYU) - New York University (NYU), Shanghai

Multiple version iconThere are 2 versions of this paper

Date Written: Febuary 16, 2018

Abstract

I develop two empirical models to quantify the agency frictions due to moral hazard in top management teams. They capture shareholders' distinct perspectives on compensating top managers: the Individual Model, in which managers in a firm unilaterally shirk, and the Team Model, in which managers choose effort jointly. The Team Model rationalizes observed compensation better than the Individual Model, underlining the importance of managerial coordination and team-based incentives. This paper also offers novel estimates of agency frictions in a team production setting. Risk premium explains a large portion of the pay differential across and within firms. The firm value would have dropped between 4% and 15% if managers shirked. Additional counterfactual estimation suggests that shareholders could reduce the total compensation by up to $17 million if they were to switch from the individual perspective to the team perspective.

Keywords: Moral Hazard, Top Management Team, Executive Compensation, Structural Model

JEL Classification: D82, J33, M12, M52

Suggested Citation

Li, Chen, Are Top Management Teams Compensated as Teams? A Structural Modeling Approach (Febuary 16, 2018). Available at SSRN: https://ssrn.com/abstract=2520188 or http://dx.doi.org/10.2139/ssrn.2520188

Chen Li (Contact Author)

New York University (NYU) - New York University (NYU), Shanghai ( email )

1555 Century Ave
Shanghai, Shanghai 200122
China

HOME PAGE: http://sites.google.com/view/chen-li

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