Executive rank, pay and project selection

Executive rank, pay and project selection This paper extends the literature on executive compensation by developing and testing a principal-agent model in the context of project selection. The model's focus on executive project selection decisions highlights the multidimensional nature of executive choices that affect the value of the firm. An executive not only makes an effort choice that determines the quality of information on which to base a decision but also sets the decision criteria for selecting projects. A project selection framework is also shown to introduce endogenous uncertainty into compensation that can influence the executive's effort choice. Using an extensive data set, our empirical work supports the main hypotheses of the model, including the significance of executive rank in determining the extent of use of incentive pay in general and equity-based incentive pay in particular. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Journal of Financial Economics Elsevier

Executive rank, pay and project selection

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Publisher
Elsevier
Copyright
Copyright © 2002 Elsevier Science B.V.
ISSN
0304-405x
D.O.I.
10.1016/S0304-405X(02)00254-4
Publisher site
See Article on Publisher Site

Abstract

This paper extends the literature on executive compensation by developing and testing a principal-agent model in the context of project selection. The model's focus on executive project selection decisions highlights the multidimensional nature of executive choices that affect the value of the firm. An executive not only makes an effort choice that determines the quality of information on which to base a decision but also sets the decision criteria for selecting projects. A project selection framework is also shown to introduce endogenous uncertainty into compensation that can influence the executive's effort choice. Using an extensive data set, our empirical work supports the main hypotheses of the model, including the significance of executive rank in determining the extent of use of incentive pay in general and equity-based incentive pay in particular.

Journal

Journal of Financial EconomicsElsevier

Published: Feb 1, 2003

References

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