Company Flexibility, the Value of Management and Managerial Compensation

25 Pages Posted: 6 Aug 2003  

Peter Christoffersen

University of Toronto - Rotman School of Management; Copenhagen Business School; University of Aarhus - CREATES

Andrey D. Pavlov

Simon Fraser University (SFU) - Finance Area

Date Written: January 20, 2003

Abstract

The variation in managerial compensation across countries and industries for firms of similar size is staggering. We analyze this phenomenon in a continuous time model of the firm, where the economic environment evolves stochastically over time and where changes to the firm operations are costly. The underlying idea is that managers in different countries and industries are compensated very differently, not necessarily because their skills differ substantially, but rather because the scope for management to add value to the firms varies substantially. If adjustment costs are low, or if the economic environment is relatively volatile, then the potential value-added from active management is larger. The positive relationship between economic environment volatility and the value of management suggests a real options interpretation of the manager: Active management can be viewed as a real option to make changes in the production plan. Our model shows that the higher the volatility of the economy, the larger the value of this real option.

Suggested Citation

Christoffersen, Peter and Pavlov, Andrey D., Company Flexibility, the Value of Management and Managerial Compensation (January 20, 2003). Available at SSRN: https://ssrn.com/abstract=418761 or http://dx.doi.org/10.2139/ssrn.418761

Peter Christoffersen (Contact Author)

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5P 3C4
Canada
416-946-5511 (Phone)

HOME PAGE: http://www.christoffersen.com

Copenhagen Business School

Solbjerg Plads 3
Frederiksberg C, DK - 2000
Denmark

University of Aarhus - CREATES

School of Economics and Management
Building 1322, Bartholins Alle 10
DK-8000 Aarhus C
Denmark

Andrey D. Pavlov

Simon Fraser University (SFU) - Finance Area ( email )

Burnaby, British Columbia V5A 1S6
Canada
604 291 5835 (Phone)
604 291 4920 (Fax)

Register to save articles to
your library

Register

Paper statistics

Downloads
290
rank
95,109
Abstract Views
2,128
PlumX