Are Top Management Teams Compensated as Teams? A Structural Modeling Approach
43 Pages Posted: 26 Feb 2018
Date Written: February 18, 2018
Do the compensation packages of individual executives reflect a team-oriented contract design? To find the answer, this paper explicitly tests two multi-agent moral hazard models on S&P 1500 firms between 1993 and 2005. The models capture a team perspective and an individual perspective respectively. I assess which model is more robust at rationalizing the observed relationship between executive compensation and firm performance. The results favor the team perspective under which managers choose effort jointly. The analysis rejects the individual perspective under which each manager separately chooses effort (taking other managers' choices as given). These findings indicate that shareholders consider managerial coordination in the compensation design. This paper suggests a need for a better understanding of the influences of managerial coordination on corporate governance and a need for more attention on the empirical relevance of team-based moral hazard models when we examine compensation efficiency and evaluate compensation reforms.
Keywords: Moral Hazard, Top Management Team, Executive Compensation, Structural Model
JEL Classification: D82, J33, M12, M52
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