Paying for observable luck

F. Feriozzi

Research output: Contribution to journalArticleScientificpeer-review

Abstract

This article examines why CEOs are rewarded for luck, namely for observable shocks beyond their control. I propose a simple hidden action model where the agent has implicit incentives to avoid bankruptcy. After signing the contract, but before acting, the agent observes a signal on future luck. Implicit incentives are weaker after good news, and call for higher pay-for-performance sensitivity in good times. As a result, managerial pay is tied to luck. The model is also consistent with recent evidence of asymmetric pay for luck, that is, a larger exposure of managerial pay to good luck than to bad.
Original languageEnglish
Pages (from-to)387-415
JournalRAND Journal of Economics
Volume42
Issue number2
DOIs
Publication statusPublished - 2011

Fingerprint

Luck
Incentives
Chief executive officer
Pay-for-performance
Bankruptcy
News
Hidden action

Cite this

Feriozzi, F. / Paying for observable luck. In: RAND Journal of Economics. 2011 ; Vol. 42, No. 2. pp. 387-415.
@article{4022235882b3449586e47b80fcd78d63,
title = "Paying for observable luck",
abstract = "This article examines why CEOs are rewarded for luck, namely for observable shocks beyond their control. I propose a simple hidden action model where the agent has implicit incentives to avoid bankruptcy. After signing the contract, but before acting, the agent observes a signal on future luck. Implicit incentives are weaker after good news, and call for higher pay-for-performance sensitivity in good times. As a result, managerial pay is tied to luck. The model is also consistent with recent evidence of asymmetric pay for luck, that is, a larger exposure of managerial pay to good luck than to bad.",
author = "F. Feriozzi",
year = "2011",
doi = "10.1111/j.1756-2171.2011.00138.x",
language = "English",
volume = "42",
pages = "387--415",
journal = "RAND Journal of Economics",
issn = "0741-6261",
publisher = "Wiley",
number = "2",

}

Paying for observable luck. / Feriozzi, F.

In: RAND Journal of Economics, Vol. 42, No. 2, 2011, p. 387-415.

Research output: Contribution to journalArticleScientificpeer-review

TY - JOUR

T1 - Paying for observable luck

AU - Feriozzi, F.

PY - 2011

Y1 - 2011

N2 - This article examines why CEOs are rewarded for luck, namely for observable shocks beyond their control. I propose a simple hidden action model where the agent has implicit incentives to avoid bankruptcy. After signing the contract, but before acting, the agent observes a signal on future luck. Implicit incentives are weaker after good news, and call for higher pay-for-performance sensitivity in good times. As a result, managerial pay is tied to luck. The model is also consistent with recent evidence of asymmetric pay for luck, that is, a larger exposure of managerial pay to good luck than to bad.

AB - This article examines why CEOs are rewarded for luck, namely for observable shocks beyond their control. I propose a simple hidden action model where the agent has implicit incentives to avoid bankruptcy. After signing the contract, but before acting, the agent observes a signal on future luck. Implicit incentives are weaker after good news, and call for higher pay-for-performance sensitivity in good times. As a result, managerial pay is tied to luck. The model is also consistent with recent evidence of asymmetric pay for luck, that is, a larger exposure of managerial pay to good luck than to bad.

U2 - 10.1111/j.1756-2171.2011.00138.x

DO - 10.1111/j.1756-2171.2011.00138.x

M3 - Article

VL - 42

SP - 387

EP - 415

JO - RAND Journal of Economics

JF - RAND Journal of Economics

SN - 0741-6261

IS - 2

ER -