The separation of ownership and control within companies cause agency problems. Executive compensation is a tool to align the interests between shareholders and top executives. This thesis studies the potential effects of executive compensation packages on the firm value and other factors. I have three main findings in this thesis. In the first paper, I show that when CEOs are probability weighting, the optimal contracts are convex. This explains the existence of option components in CEO's compensation packages. In the second paper, I find that the wage of the employee is increasing in the CEO pay. This relationship is found both across firms and across time. I ascribe this relationship to the behindness aversion of workers. The result suggests CEO compensation incurs extra costs to the firms. In the third paper, I show that firms with low wage gaps between CEO and workers are overpriced on the stock market. The effect should be even stronger in the presence of inequalityaverse investors. This finding suggests that investors do trade on the pay inequality, and show that the mis-pricing comes from the overvaluation of low wage gap stocks.

CEO compensation, optimal contract, inequality aversion, stock returns
I. Dittmann (Ingolf) , S. van Bekkum (Sjoerd)
Erasmus University Rotterdam
Tinbergen Instituut Research Series
Department of Business Economics

Zhu, Y. (2018, November). On the Effects of CEO Compensation (No. 726). Tinbergen Instituut Research Series. Erasmus University Rotterdam. Retrieved from