Bonuses and Non-Public Information in Publicly Traded Firms

The literature on relational incentive contracts suggests that rms may be able to condition payments to employees on information that is not available to those outside the rm. Given this, market participants may use the magnitude of such payments to infer the non-public information, which then may give rms a reason to choose wage payments strategically. We combine the literatures on relational incentive contracts (from labor economics) and signaling to nancial markets (from nance) and examine equilibria of a signaling game in which payments from a rm to a manager convey information regarding the rm's future cash ows. Our model reveals how the nature of the rm's relationship with its manager is a ected by the rm's incentive to choose wage payments strategically. We discuss implications of our model for rms' choices over the mix of compensation instruments for top executives, as well as possible e ects of executive compensation disclosure rules.