Search for Optimal CEO Compensation: Theory and Empirical Evidence

• Main Authors: CAO, Melanie, WANG, Rong
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2008
• Subjects: Corporate Finance; Human Resources Management
• Online Access: https://ink.library.smu.edu.sg/lkcsb_research/3809; https://ink.library.smu.edu.sg/context/lkcsb_research/article/4808/viewcontent/ceo_search_April2010.pdf
• Institution: Singapore Management University

We integrate an agency model with dynamic search equilibrium to study three important issues concerning executive compensation. We show that 1) the equilibrium pay-to-performance sensitivity depends positively on a firm’s specific risk, and negatively on its systematic risk, which offers a plausible explanation for the inconclusive empirical relationship between the pay-to-performance sensitivity and a firm’s total risk; 2) a growing economy simultaneously induces the growth in executive compensation and firm size; 3) the faster growth of executive compensation relative to the growth of firm size in the past decade is mostly due to the increase in firms’ specific risks.