English, Article, Journal or magazine article edition: Paying to Make a Difference: Executive Compensation and Product Dynamics Antonio Falato

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Bookmark: http://trove.nla.gov.au/version/30486
Physical Description
  • preprint
Language
  • English

Edition details

Title
  • Paying to Make a Difference: Executive Compensation and Product Dynamics
Author
  • Antonio Falato
Physical Description
  • preprint
Notes
  • This paper develops an agency model of executive compensation in dynamic industry equilibrium. Firms differ in the quality of their products, and managers can make a difference as higher effort brings about product improvement. I show that there is an inverse relationship between the magnitude of the performance-based component of optimal compensation contracts and the degree of product differentiation, as managerial effort is less likely to make a difference for firms with more differentiated products. Empirically, I find strong evidence of this inverse relation in the compensation of US executives. In particular, I find that pay-performance sensitivity depends negatively on industry- and firm-level measures of product differentiation, even after controlling for industry fixed effects and standard measures of product market competition. Moreover, industry leaders have weaker pay-performance sensitivity than laggards, even after controlling for firm size. My findings suggest that industry is an important determinant of executive compensation
  • Incentives, Optimal Contracts, Executive Compensation, Industry Dynamics
  • RePEc:red:sed006:690
Language
  • English
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