Career-risk concerns, information effort, and optimal pay-for-performance sensitivity
Prior work has established that managers’ concerns about the level of their future compensation (i.e., implicit incentives from career concerns) may substitute for explicit incentives in compensation contracts offered to the managers in a single-task setting (Gibbons and Murphy 1992). We show that the substitution effect can be weakened, and even reversed, when managers (1) exert effort, in addition to production effort, to influence information about their ability, and (2) are concerned about both the level and variability of their reputation. We also find that managerial concern about the variability of reputation can lead to the optimal pay-for-performance sensitivity increasing in the underlying risk measure, rather than decreasing in risk, as in standard incentiverisk trade-offs. We test these predictions using a large sample of CEO compensation outcomes. Results are consistent with our model predictions.
Duke Scholars
Published In
DOI
EISSN
ISSN
Publication Date
Volume
Issue
Start / End Page
Related Subject Headings
- 1501 Accounting, Auditing and Accountability
Citation
Published In
DOI
EISSN
ISSN
Publication Date
Volume
Issue
Start / End Page
Related Subject Headings
- 1501 Accounting, Auditing and Accountability