A theory of fair CEO pay

Chaigneau, Pierre, Edmans, Alex and Gottlieb, Daniel ORCID: 0000-0002-0555-6185 (2025) A theory of fair CEO pay. American Economic Review: Insights, 7 (3). 306 – 324. ISSN 2640-205X

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Abstract

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.

Item Type:	Article
Additional Information:	© 2025 The Author(s)
Divisions:	Management
Subjects:	H Social Sciences > HB Economic Theory H Social Sciences > HD Industries. Land use. Labor > HD28 Management. Industrial Management
JEL classification:	D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D86 - Economics of Contract: Theory G - Financial Economics > G3 - Corporate Finance and Governance > G32 - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure J - Labor and Demographic Economics > J3 - Wages, Compensation, and Labor Costs > J33 - Compensation Packages; Payment Methods G - Financial Economics > G3 - Corporate Finance and Governance > G34 - Mergers; Acquisitions; Restructuring; Corporate Governance
Date Deposited:	11 Nov 2024 10:15
Last Modified:	15 Sep 2025 11:27
URI:	http://eprints.lse.ac.uk/id/eprint/125993

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