Are Top Management Teams Compensated as Teams? A Structural Modeling Approach

• In Event: Benchmarking in Corporate Governance

Abstract

Do the compensation packages of individual executives reflect a team-oriented compensation design of shareholders? Understandings diverge in the literature mainly because the primitive determinants of compensation contract are not observable. To directly address this question, this paper explicitly tests theory-based restrictions on the data from S&P 1500 firms between 1993 and 2005, which are requested by two moral hazard models respectively. My results support a team perspective under which each manager chooses effort jointly with other managers. My analysis rejects an individual perspective under which each manager separately chooses effort, taking others' choices as given. These findings indicate that managerial coordination is considered by shareholders in their compensation design. This paper suggests a need for a better understanding of the influences of managerial coordination on corporate governance quality and a need for more attention on the empirical relevance of team-based moral hazard models when we examine compensation efficiency and evaluate compensation reforms.

Author

• Chen Li, CUNY-Baruch College