This paper explores fairness in CEO pay and performance-based contracts, revealing implications for equity and effort.
This paper studies executive pay with fairness concerns: If the CEO's wage falls below a perceived fair share of output, he suffers disutility that is increasing in the discrepancy. Fairness concerns do not always lead to fair wages; instead, the firm threatens the CEO with unfair wages for low output to induce effort. The contract sometimes involves performance-vesting equity: The CEO is paid a constant share of output if it is sufficiently high and zero otherwise. Even without moral hazard, the contract features pay-for-performance to address fairness concerns and ensure participation. This rationalizes pay-for-performance even if effort incentives are unnecessary. (JEL D63, D82, D86, G34, M12, M52)
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Chaigneau et al. (2025) studied this question.
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