Strategic Flexibility and the Optimality of Pay for Sector Performance

Blockholder monitoring and the efficiency of pay-performance benchmarking

“…Following this study, Garvey and Milbourn (2006) find that CEOs get paid for luck via asymmetric benchmarking of pay to performance; that is, pay increases when performance goes up because of exogenous shocks, but it does not decrease as much when performance goes down because of exogenous shocks. Although these regularities do not provide prima facie support for the efficient provision of incentives, recent theoretical and empirical studies argue that this asymmetry in benchmarking is optimal (Celentani and Loveira, 2006;Gopalan et al, 2010). In this article, I examine the asymmetric benchmarking of CEO compensation by relating it to the monitoring role of large shareholders with heterogeneous investment horizons.…”

Relative Performance Evaluation in an Oligopoly

“…In contrast, when common risk is insignificant relative to a firm's own risk, the firm's shareholders will prefer to select as peer group rivals those firms whose specific risks are highly absolutely correlated with that of the firm. In other words, when examining the joint effect of RPE use and its related peer group upon the firms' profits, it is necessary that firm industry-level or sector-level performance (Gopanlan, Milbourn, and Song 2010;Albuquerque 2010) be partitioned in accordance with the ratio of common risk versus firm-specific risk.…”

“…3 See e.g., Vickers (1985), Fershtman and Judd (1987), and Sklivas (1987); Dye (1992), and Gopanlan, Milbourn, and Song (2010).…”

Relative Wealth Concerns, Executive Compensation, and Systemic Risk-Taking

“…To rationalize such a compensation practice, Hoffmann and Pfeil (2010) and Noe and Rebello (2012) show that pay-forluck can arise in a dynamic model if luck shocks are informative of future profitability. Gopalan et al (2010) and Feriozzi (2011) propose alternative hypotheses based on strategic flexibility and implicit incentives created by the likelihood of bankruptcy, respectively. The models of Himmelberg and Hubbard (2000), Oyer (2004), and Chaigneau and Sahuguet (2012) show that pay-for-luck can be driven by changes in CEOs' reservation wages, as determined in a competitive labor market.…”