Optimal CEO Incentives and Industry Dynamics
نویسندگان
چکیده
This paper develops a competitive equilibrium model of CEO compensation and industry dynamics. CEOs make product pricing and product improvement decisions subject to shareholders compensation choices and idiosyncratic shocks to product quality. The choice of highpowered incentives optimally trades-o¤ the bene ts from expected product improvements and the associated agency costs. In market equilibrium, the interaction between CEO pay and product market decisions a¤ects the stationary distribution of rms. We characterize a dynamic feedback e¤ect of industry structure on CEO incentives. As a result of this e¤ect, we predict an inverse relation between the magnitude of the performance-based compenent of CEO pay and, (i) across industries, the degree of heterogeneity of industry structure; (ii) within industries, rm position with respect to its peers. We empirically estimate pay-performance sensitivity for a large sample of U.S. CEOs and other top executives over the 1993 to 2004 period and nd strong support for our theory. Our results o¤er a novel product market rationale for the increased reliance of CEO pay on bonuses and stock options over the 1990s.
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