The effect of monitoring on CEO pay practices in a matching equilibrium

Publication Date
Financial Markets Group Discussion Papers DP 725
Publication Authors

We present a model of efficient contracting with endogenous matching and limited monitoring in which firms compete for CEOs. The model explains the association between limited monitoring and CEO pay practices such as pay-for-luck, high salaries, a low pay-performance sensitivity, and a more asymmetric pay-for-performance relation. The results are driven by the matching equilibrium: firms with different capacities for monitoring hire different types of CEOs and offer different compensation contracts. The model thus responds to some fundamental arguments of the managerial power perspective.