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Industry structure, executive pay, and short-termism
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Thanassoulis, John (2013) Industry structure, executive pay, and short-termism. Management Science, Volume 59 (Number 2). pp. 402-419. doi:10.1287/mnsc.1120.1601
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Official URL: http://dx.doi.org/10.1287/mnsc.1120.1601
Abstract
This study outlines a new theory linking industry structure to optimal employment contracts and executive short-termism. Firms hire their executives using optimal contracts derived within a competitive labour market. To motivate effort, firms must use some variable remuneration. Such remuneration introduces a myopia problem: an executive would wish to inflate early expected earnings at some risk to future profits. To manage this short-termism, some bonus pay is deferred. Convergence in size among firms makes the cost of managing the myopia problem grow faster than the cost of managing the effort problem. Eventually, the optimal contract jumps from one deterring myopia to one tolerating myopia. Under some conditions, the industry partitions: the largest firms hire executives on contracts tolerant of myopia; smaller firms ensure myopia is ruled out.
| Item Type: | Journal Article | ||||||||||
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| Subjects: | H Social Sciences > HD Industries. Land use. Labor H Social Sciences > HG Finance |
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| Divisions: | Faculty of Social Sciences > Warwick Business School > Financial Econometrics Research Centre Faculty of Social Sciences > Warwick Business School |
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| Library of Congress Subject Headings (LCSH): | Bankers -- Salaries, etc., Employee fringe benefits, Financial services industry -- Employees -- Salaries, etc., Executives -- Salaries, etc. | ||||||||||
| Journal or Publication Title: | Management Science | ||||||||||
| Publisher: | Institute for Operations Research and the Management Sciences (I N F O R M S) | ||||||||||
| ISSN: | 0025-1909 | ||||||||||
| Official Date: | February 2013 | ||||||||||
| Dates: |
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| Volume: | Volume 59 | ||||||||||
| Number: | Number 2 | ||||||||||
| Page Range: | pp. 402-419 | ||||||||||
| DOI: | 10.1287/mnsc.1120.1601 | ||||||||||
| Status: | Peer Reviewed | ||||||||||
| Publication Status: | Published | ||||||||||
| Access rights to Published version: | Open Access | ||||||||||
| Adapted As: |
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