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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

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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
Subjects: H Social Sciences > HD Industries. Land use. Labor
H Social Sciences > HG Finance
Divisions: Faculty of Social Sciences > Warwick Business School > Financial Econometrics Research Centre
Faculty of Social Sciences > Warwick Business School
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:
DateEvent
February 2013Published
8 November 2012Available
5 June 2012Accepted
15 June 2011Submitted
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
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