NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Rajesh Aggarwal

Carlson School of Management
Finance
University of Minnesota
3-285 CarlSMgmt
321 19th Ave S
Minneapolis, MN 55455
Tel: 612/625-5679

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NBER Working Papers and Publications

September 1999Performance Incentives Within Firms: The Effect of Managerial Responsibility
with Andrew A. Samwick: w7334
Empirical research on executive compensation has focused almost exclusively on the incentives provided to chief executive officers. However, firms are run by teams of managers, and a theory of the firm should also explain the distribution of incentives and responsibilities for other members of the top management team. An extension of the standard principal-agent model to allow for multiple signals of effort predicts that executives who have other, more precise signals of their effort than firm performance will have compensation that is less sensitive to the overall performance of the firm. We test this prediction in a comprehensive panel dataset of executives at large corporations by comparing executives with explicit divisional responsibilities to those with broad oversight authority over...

Published: Journal of Finance, Vol. 58, no. 4 (August 2003): 1613-1649 citation courtesy of

Empire-Builders and Shirkers: Investment, Firm Performance, and Managerial Incentives
with Andrew A. Samwick: w7335
Do firms systematically over- or underinvest as a result of agency problems? We develop a contracting model between shareholders and managers in which managers have private benefits or private costs of investment. Managers overinvest when they have private benefits and underinvest when they have private costs. Optimal incentive contracts mitigate the over- or underinvestment problem. We derive comparative static predictions for the equilibrium relationships between incentives from compensation, investment, and firm performance for both cases. The relationship between firm performance and managerial incentives, in isolation, is insufficient to identify whether managers have private benefits or private costs of investment. In order to identify whether managers have private benefits or costs...

Published: Journal of Corporate Finance, Vol. 12, no. 3 (June 2006): 489-515 citation courtesy of

July 1998The Other Side of the Tradeoff: The Impact of Risk on Executive Compensation
with Andrew A. Samwick: w6634
The principal-agent model of executive compensation is of central importance to the modern theory of the firm and corporate governance, yet the existing empirical evidence supporting it is quite weak. The key predication of the model is that the executive's pay-performance sensitivity is decreasing in the variance of the firm's performance. We demonstrate strong empirical confirmation of this prediction using a comprehensive sample of executives at large corporations. In general, the pay-performance sensitivity for executives at firms with the least volatile stock prices is an order of magnitude greater than the pay-performance sensitivity for executives at firms with the most volatile stock prices. This result holds for both chief executive officers and for other highly compensated ex...

Published: Journal of Political Economy, Vol. 107 (February 1999): 65-105. citation courtesy of

July 1996Executive Compensation, Strategic Competition, and Relative Performance Evaluation: Theory and Evidence
with Andrew A. Samwick: w5648
We argue that strategic interactions between firms in an oligopoly can explain the puzzling lack of high-powered incentives in executive compensation contracts written by shareholders whose objective is to maximize the value of their shares. We derive the optimal compensation contracts for managers and demonstrate that the use of high-powered incentives will be limited by the need to soften product market competition. In particular, when managers can be compensated based on their own and their rivals' performance, we show that there will be an inverse relationship between the magnitude of high-powered incentives and the degree of competition in the industry. More competitive industries are characterized by weaker pay-performance incentives. Empirically, we find strong evidence of this i...

Published: Journal of Finance, Vol. 54 (December 1999): 1999-2043. citation courtesy of

 
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