Are Top Management Teams Compensated as Teams? A Structural Modeling Approach
Management Science · 2024 · Volume 70 · Issue 12
Abstract
I develop two empirical models to quantify agency friction caused by moral hazard in top management teams. They capture shareholders’ distinct perspectives on compensating top managers: the Individual Model , in which managers in a firm unilaterally shirk, and the Team Model , in which managers choose effort jointly. The Team Model rationalizes observed compensation better than the Individual Model , underlining the importance of managerial coordination and team-based incentives. This paper also offers novel estimates of agency friction in a team production setting. Risk premium explains a large portion of the pay differential across and within firms. Firm value would have dropped between 4% and 15% if managers shirked. Additional counterfactual estimation suggests that shareholders could reduce the total compensation by up to $17 million if they were to switch from the individual perspective to the team perspective. This paper was accepted by Shivaram Rajgopal, accounting. Funding: This work was supported by the Professional Staff Congress and the City University of New York (PSC-CUNY) [Grant 67780-00 45]. Supplemental Material: The online appendix is available at https://doi.org/10.1287/mnsc.2024.4982 .
Keywords
moral hazard, top management team, executive compensation, structural model
Enable JavaScript for citation tools and additional paper interactions.