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- Publisher
- Wiley
- Copyright
- © 2011, RAND
- ISSN
- 0741-6261
- eISSN
- 1756-2171
- DOI
- 10.1111/j.1756-2171.2011.00138.x
- Publisher site
- See Article on Publisher Site
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.
Journal
The Rand Journal of Economics – Wiley
Published: Jun 1, 2011