Download This PaperA Theory of Fair CEO Pay
European Corporate Governance Institute – Finance Working Paper No. 865/2022
American Economic Review: Insights, forthcoming
21 Pages Posted: 11 Dec 2022 Last revised: 17 Oct 2024
Date Written: December 1, 2023
Abstract
This paper studies executive pay with fairness concerns: if the CEO's wage falls below a perceived fair share of output, he suffers disutility that is increasing in the discrepancy. Fairness concerns do not always lead to fair wages; instead, the firm threatens the CEO with unfair wages for low output to induce effort. The contract sometimes involves performance-vesting equity: the CEO is paid a constant share of output if it is sufficiently high, and zero otherwise. Even without moral hazard, the contract features pay-for-performance, to address fairness concerns and ensure participation. This rationalizes pay-for-performance even if effort incentives are unnecessary.
Keywords: moral hazard, executive compensation, fairness
JEL Classification: D86, G32, G34, J33
Suggested Citation: Suggested Citation
Pierre Chaigneau
Queen's University ( email )
Smith School of Business - Queen's University
143 Union Street
Kingston, Ontario K7L 3N6
Canada
European Corporate Governance Institute (ECGI)
c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium
European Corporate Governance Institute (ECGI) ( email )
c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium
Daniel Gottlieb
London School of Economics ( email )
New Academic Building 5.30
Houghton Street
London, WC2A 2AE
United Kingdom
HOME PAGE: http://https://personal.lse.ac.uk/gottlied/