Are Incentive Contracts Rigged by Powerful CEOs?
- Author(s): ADAIR MORSE, VIKRAM NANDA, AMIT SERU
- Published: Sep 21, 2011
- Pages: 1779-1821
- DOI: 10.1111/j.1540-6261.2011.01687.x
We argue that some powerful CEOs induce boards to shift the weight on performance measures toward the better performing measures, thereby rigging incentive pay. A simple model formalizes this intuition and gives an explicit structural form on the rigged incentive portion of CEO wage function. Using U.S. data, we find support for the model’s predictions: rigging accounts for at least 10% of the compensation to performance sensitivity and it increases with CEO human capital and firm volatility. Moreover, a firm with rigged incentive pay that is one standard deviation above the mean faces a subsequent decrease of 4.8% in firm value and 7.5% in operating return on assets.