Non-Performance Pay and Relational Contracting: Evidence from CEO Compensation

TY - JOUR

T1 - Non-Performance Pay and Relational Contracting: Evidence from CEO Compensation

AU - DeVaro, Jed

AU - Kim, Jin-Hyuk

AU - Vikander, Nick

PY - 2018/8

Y1 - 2018/8

N2 - CEOs are routinely compensated for aspects of firm performance that are beyond their control. This is puzzling from an agency perspective, which assumes performance pay should be efficient. Working within an agency framework, we provide a rational for this seemingly inefficient feature of CEO compensation by invoking the idea of informal agreements, specifically the theory of relational contracting. We derive observable implications to distinguish relational from formal contracting and, using ExecuComp data, find that CEOs' annual cash and equity incentive payments positively correlate with the cyclical component of sales and respond to measures of persistence as relational contracting theory predicts.

AB - CEOs are routinely compensated for aspects of firm performance that are beyond their control. This is puzzling from an agency perspective, which assumes performance pay should be efficient. Working within an agency framework, we provide a rational for this seemingly inefficient feature of CEO compensation by invoking the idea of informal agreements, specifically the theory of relational contracting. We derive observable implications to distinguish relational from formal contracting and, using ExecuComp data, find that CEOs' annual cash and equity incentive payments positively correlate with the cyclical component of sales and respond to measures of persistence as relational contracting theory predicts.

KW - Faculty of Social Sciences

KW - relational contracts

KW - CEO compensation

KW - pay‐for‐luck

KW - skimming view

U2 - 10.1111/ecoj.12471

DO - 10.1111/ecoj.12471

M3 - Journal article

SN - 0013-0133

VL - 128

SP - 1923

EP - 1951

JO - Economic Journal

JF - Economic Journal

IS - 613

ER -