{"title":"Firm Performance Pay as Insurance against Promotion Risk","authors":"ALVIN CHEN","doi":"10.1111/jofi.13379","DOIUrl":null,"url":null,"abstract":"<p>The prevalence of pay based on risky firm outcomes for nonexecutive workers presents a puzzling departure from conventional contract theory, which predicts insurance provision by the firm. When workers at the same firm compete against each other for promotions, the optimal contract features pay based on firm outcomes as insurance against promotion risk. The model's predictions are consistent with many observed phenomena, such as performance-based vesting and overvaluation of equity pay by nonexecutive workers. It also generates novel predictions linking a firm's hierarchy to its workers' pay structure.</p>","PeriodicalId":15753,"journal":{"name":"Journal of Finance","volume":"79 5","pages":"3497-3541"},"PeriodicalIF":7.6000,"publicationDate":"2024-08-12","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"https://onlinelibrary.wiley.com/doi/epdf/10.1111/jofi.13379","citationCount":"0","resultStr":null,"platform":"Semanticscholar","paperid":null,"PeriodicalName":"Journal of Finance","FirstCategoryId":"96","ListUrlMain":"https://onlinelibrary.wiley.com/doi/10.1111/jofi.13379","RegionNum":1,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":null,"EPubDate":"","PubModel":"","JCR":"Q1","JCRName":"BUSINESS, FINANCE","Score":null,"Total":0}
引用次数: 0
Abstract
The prevalence of pay based on risky firm outcomes for nonexecutive workers presents a puzzling departure from conventional contract theory, which predicts insurance provision by the firm. When workers at the same firm compete against each other for promotions, the optimal contract features pay based on firm outcomes as insurance against promotion risk. The model's predictions are consistent with many observed phenomena, such as performance-based vesting and overvaluation of equity pay by nonexecutive workers. It also generates novel predictions linking a firm's hierarchy to its workers' pay structure.
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