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Joe Mahoney University of Illinois at Urbana-Champaign

Economics, Organization and Management Chapter 13: Executive and Managerial Compensation. Joe Mahoney University of Illinois at Urbana-Champaign. Milgrom and Roberts (1992): Chapter 13 Economics, Organization & Management.

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Joe Mahoney University of Illinois at Urbana-Champaign

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  1. Economics, Organization and ManagementChapter 13: Executive and Managerial Compensation Joe Mahoney University of Illinois at Urbana-Champaign

  2. Milgrom and Roberts (1992): Chapter 13 Economics, Organization & Management • Managers who have human capital in a firm may be risk-averse. • Giving stock options to managers, which rewards them for making positive NPV investments may offset some of this risk aversion. • To avoid accepting too many risky projects, the company may need to have different groups approve a decision.

  3. Milgrom and Roberts (1992): Chapter 13 Economics, Organization & Management • Deferred compensation formulas, where payments are tied to the firm’s future performance will help encourage managers to take a long-term view rather than to concentrate excessively on short-term results. • Payment in stock that cannot be sold immediately or in options that cannot be exercised before a certain date would be examples.

  4. Milgrom and Roberts (1992): Chapter 13 Economics, Organization & Management • A major debate concerns the pay received by CEOs of large U.S. firms. • Some observers see them as the outcome of managerial greed. • Others worry that executives are not paid enough to attract the best talent corporations rather than to such fields as investment banking, consulting and entrepreneurship. • Another concern is that there are not sufficient financial incentives to solve agency problems between managers and shareholders.

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