Agency, Delayed Compensation, and the Structure of Executive Remuneration

32 Pages Posted: 28 Dec 2006 Last revised: 18 Aug 2010

See all articles by Jonathan Eaton

Jonathan Eaton

Leonard N. Stern School of Business - Department of Economics; National Bureau of Economic Research (NBER)

Harvey S. Rosen

Princeton University - Department of Economics; National Bureau of Economic Research (NBER); CESifo (Center for Economic Studies and Ifo Institute)

Date Written: October 1981

Abstract

In this paper we examine the factors affecting the structure of executives' compensation packages. We focus particularly on the role of various types of delayed compensation as means of "bonding" executives to their firms. The basic problem is to design a compensation package that rewards actions that are in the long-run interest of the stockholders. Firms must take into account (1) their ability to discern unfortunate circumstances from mismanagement; (2) the extent to which a compensation package forces the executive to face risks, beyond his control; and (3) the willingness of a given executive to bear this risk. We use our theory to interpret some executive compensation data from the early 1970's. The results are generally in line with the theoretical predictions.

Suggested Citation

Eaton, Jonathan and Rosen, Harvey S., Agency, Delayed Compensation, and the Structure of Executive Remuneration (October 1981). NBER Working Paper No. w0777. Available at SSRN: https://ssrn.com/abstract=351328

Jonathan Eaton (Contact Author)

Leonard N. Stern School of Business - Department of Economics ( email )

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National Bureau of Economic Research (NBER)

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Harvey S. Rosen

Princeton University - Department of Economics ( email )

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National Bureau of Economic Research (NBER)

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CESifo (Center for Economic Studies and Ifo Institute)

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Germany

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