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.
Corporate Finance | Human Resources Management
China International Conference in Finance, 2-5 July 2008, Dalian
City or Country
CAO, Melanie and WANG, Rong.
Search for Optimal CEO Compensation: Theory and Empirical Evidence. (2008). China International Conference in Finance, 2-5 July 2008, Dalian. Research Collection Lee Kong Chian School Of Business.
Available at: http://ink.library.smu.edu.sg/lkcsb_research/3809