Working Paper: NBER ID: w0777
Authors: Jonathan Eaton; Harvey S. Rosen
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.
Keywords: Executive Compensation; Delayed Compensation; Agency Theory
JEL Codes: J33; G34
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| monitoring costs (Q52) | executive compensation design (M12) |
| risk assessment (D80) | executive compensation design (M12) |
| younger executives (M12) | compensation packages reliant on future performance indicators (J33) |
| higher tax brackets (H29) | preference for delayed compensation (J33) |
| high research and development expenditures (O32) | compensation structures less tied to firm performance (J33) |