Essays on executive compensation
Abstract
This dissertation includes two essays investigating issues on the topic of executive compensation. In both essays, a principal-agent model of executives' actions is expanded to include not only an effort choice but also the determination of a criterion for the adoption of new projects. In particular, it is assumed that an executive's project evaluation efforts affect the precision of signals regarding the true value of proposed projects, while the executive's setting of a reservation signal determines the likelihood projects with different characteristics are pursued. Essay One extends the literature on executive compensation by developing and testing the model with respect to the use of equity in executive compensation. In so doing, new evidence is offered on the significance of firm characteristics and executive rank in determining not only the frequency with which equity-based compensation is utilized, both within and across firms, but also the degree to which such forms of payment contribute to the total compensation of executives. The theoretical framework also provides insight into the different roles played by two common forms of equity compensation, restricted stock and stock options. Essay Two more fully explores both theoretically and empirically these two common forms of contracting compensation. Stock grants, unlike stock options, are attractive in that they do not introduce a potential bias in the executive's decision toward adopting projects. Stock options are attractive in that, for the same expected value as stock grants, stock options provide the principal with leverage to motivate an executive to undertake more extensive project evaluation. Thus, one expects more extensive use of stock options in cases where an increase in effort devoted to project evaluation is more highly valued by the principal. It is argued that this increased gain to additional project evaluation exists at firms with high research and development and for more junior executives. Empirical support for these claims is provided using an extensive panel data set on executive compensation at large U.S. firms.
Degree
Ph.D.
Advisors
Barron, Purdue University.
Subject Area
Economics|Labor economics|Management
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