• Published : THE JOURNAL OF FINANCE VOL. 65 NO.

6
(DECEMBER 2010)
• Respondents : 595 CEO
• Link : https://www.jstor.org/stable/23324404
• Methods : Analyze stylized CEO compensation contracts
that consist of stock, options, and fixed compensation in a model where the CEO is
Sticks or Carrots? loss averse.

Optimal CEO • Hypothesis :

1. The loss-aversion model generates optimal contracts that are similar to ob-
Compensation when served contracts for a range of parameterizations where the reference wage
of the CEO is low. For higher reference wages the model generates contracts
Managers Are Loss that are concave and different from contracts observed in practice.
• Results :
Averse 1. The more averse the agent is to losses, the more options are used in the opti-
mal contract, because the risk-tolerance effect increases with the extent of
loss aversion.
2. Higher reference wages lead to a higher dismissal probability and to a lower
pay-for-performance sensitivity (PPS) on the job.
 • Published : THE JOURNAL OF FINANCE VOL. 68 NO. 5
(OCTOBER 2013)
• Respondents :-
• Link : https://www.jstor.org/stable/42002602
• Methods : Construct a theoretical model to integrate an
agency problem in CEO compensation with search theory and analyze the market
equilibrium with many firms and CEOs.

Optimal CEO • Hypothesis :

1. Instead of focusing on total risk as in the extant literature, our model
Compensation with distinguishes a firm’s idiosyncratic risk from systematic risk.

Search: Theory and 2.

3.
A CEO can choose to quit after privately observing the idiosyncratic shock.
There are contracting interactions/externalities among firms in the market
Empirical Evidence equilibrium that work through endogenous outside options and matching
probabilities.
• Results :
1. The equilibrium PPS depends positively on a firm’s idiosyncratic risk, and
negatively on a firm’s systematic risk.
2. The ratio of a ceo’s total compensation to firm value depends positively on
firm idiosyncratic risks and negatively on firm systematic risks.
New York Times Article About CEO Compensation