Are Top Management Teams Compensated as Teams? A Structural Modeling Approach
46 Pages Posted: 22 Feb 2018 Last revised: 16 Feb 2021
Date Written: Febuary 16, 2018
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: Suggested Citation