Private Pre-Decision Information and the Pay–Performance Relation

ABSTRACT We study how the precision of managers’ private post-contract pre-decision information affects pay–performance relation. Endogenizing environment, we find that firms may optimally tie executive pay closer to firm performance as agency problems become more pronounced. Specifically, varying parameters measuring severity problem, identify parameter regions where with pronounced combine uninformative signals a higher incentive rate than less choose perfect signal. this relation for various measures conflict such incongruency measure, its susceptibility manipulation, or agent’s degree risk aversion. Because sensitivity is frequently used efficiency real-world compensation arrangements, our results provide relevant insights empirical research studying determinants between and performance. JEL Classifications: D81; D86; M12; M52.