The Journal of Finance publishes leading research across all the major fields of finance. It is one of the most widely cited journals in academic finance, and in all of economics. Each of the six issues per year reaches over 8,000 academics, finance professionals, libraries, and government and financial institutions around the world. The journal is the official publication of The American Finance Association, the premier academic organization devoted to the study and promotion of knowledge about financial economics.
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Too Much, Too Soon, for Too Long: The Dynamics of Competitive Executive Compensation
Published: 07/30/2025 | DOI: 10.1111/jofi.13470
GILLES CHEMLA, ALEJANDRO RIVERA, LIYAN SHI
We examine executive compensation in a general equilibrium model with dynamic moral hazard, where executives' outside options are endogenously determined by equilibrium market compensation. Firms provide incentives through compensation packages featuring deferred payments as “carrots” and termination as “sticks.” Crucially, the effectiveness of termination as an incentive device is undermined by the outside options available to executives. As individual firms fail to internalize the effect of their compensation design on these endogenous outside options, the equilibrium is generally inefficient. Compared to shareholder‐value‐maximizing compensation packages, executives are paid too much, too soon, and keep their jobs for too long.