Strategic Flexibility and the Optimality of Pay for Sector Performance

  title={Strategic Flexibility and the Optimality of Pay for Sector Performance},
  author={Radhakrishnan Gopalan},
While standard contract theory suggests that a Chief Executive Officer (CEO) should be paid relative to a benchmark that removes the effects of sector performance, there is evidence that CEO pay is strongly and positively related to such sector performance. In this article, we offer an explanation. We model a CEO charged with selecting the firm’s strategy that determines the firm’s exposure to sector performance. To incentivize the CEO to choose optimally, pay contracts will be positively and… CONTINUE READING
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