We estimate a principal-agent model of moral hazard with longitudinal data on firms and managerial compensation over two disjoint periods spanning 60 years to investigate increased value and variability in managerial compensation. We find exogenous growth in firm size largely explains these secular trends in compensation. In our framework, exogenous firm size works through two channels. First, conflicts of interest between shareholders and managers are magnified in large firms, so optimal compensation plans are now more closely linked to insider wealth. Second, the market for managers has become more differentiated, increasing the premium paid to managers of large versus small firms.
American Economic Review
D82: Asymmetric and Private Information; Mechanism Design
L25: Firm Performance: Size, Diversification, and Scope
M12: Personnel Management; Executive Compensation
M52: Personnel Economics: Compensation and Compensation Methods and Their Effects