Optimal CEO Incentive Contracts: A Prospect Theory Explanation
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Keywords

CEO
Incentives
Compensation
Firm Performance

How to Cite

Harris, M., Aaron, J., McDowell, W., & Cline, B. (2014). Optimal CEO Incentive Contracts: A Prospect Theory Explanation. Journal of Business Strategies, 31(2), 336–356. https://doi.org/10.54155/jbs.31.2.336-356

Abstract

This study examines the relationship between CEO incentive-based compensation
and firm performance, based on the role of prospect theory in executive
compensation. Our results indicate that moderate levels of performance-based CEO
compensation are generally optimal. When an executive’s total compensation package
is based more on firm performance there is often a level of higher returns, but to
a point of diminishing return. Our findings suggest that boards must clearly communicate
with CEOs to determine the most appropriate levels of incentive-based compensation.
Additional managerial and theoretical implications are offered, as well as avenues for future research.

https://doi.org/10.54155/jbs.31.2.336-356
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