Are Top Management Teams Compensated as Teams? A Structural Modeling Approach

Download or read book Are Top Management Teams Compensated as Teams? A Structural Modeling Approach written by Chen Li and published by . This book was released on 2019 with total page 49 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper develops an empirical approach to explicitly test two multi-agent moral hazard models on executive compensation in S&P 1500 firms, which distinguish between a team perspective and an individual perspective. This approach assesses which model is more robust at rationalizing the observed relationship between executive compensation and firm performance. The results favor the team perspective under which unilateral shirking is assumed infeasible for managers. The analysis rejects the individual perspective under which each manager can unilaterally shirk. This paper also quantifies three model-based measures of agency costs. The risk premium can explain up to 37% of total compensation for higher-paid managers in large firms. This upper bound is higher than that of lower-paid managers and all managers in small firms. Shareholders could experience a reduction in equity return by 0.04-0.15 due to managers shirking. In addition, shareholders could benefit from switching from an individual-perspective contract to a team-perspective contract. Such counterfactual analysis predicts the risk premium could be reduced by $1 million-$17 million in the compensation of the higher-paid managers and $0.1 million-$3 million in the compensation of the lower-paid managers.