Optimal Executive Compensation Dispersion and Product Market Structure

Yutong  Li; Ding  Chen; Shin-Hwan  Chiang

doi:10.4236/ajibm.2018.89135

Ding Chen^1,2^*, Shin-Hwan Chiang³, Yutong Li¹

Abstract: Executive compensation is considered as one of the most crucial issues for the corporate governance. The proper executive compensation dispersion can be employed to motivate the top managers and then to boost the firm performance, but the definition of “proper” varies in the existing literature. The bigger dispersion is better for firm performance based on Tournament Theory but smaller one is better according to some other theories. In this paper, we try to theoretically study the optimal executive compensation by considering the internal and external situation of the firm at the same time, especially the influence of product market. We find the optimal compensation dispersion will increase (decrease) if more (less) firms enter the market when the cost of sabotage increases more rapidly than the cost of effort, vice versa. The findings imply the firm should increase (decrease) the compensation dispersion if the intensity of competition in product market decreases (increases) when sabotage is expensive and the firm should increase (decrease) the compensation dispersion if the intensity of competition in product market increases (decreases) when sabotage is cheap.

Keywords: Wage Dispersion, Market Structure, Tournaments, Executive Compensation

Cite this paper: Chen, D. , Chiang, S. and Li, Y. (2018) Optimal Executive Compensation Dispersion and Product Market Structure. American Journal of Industrial and Business Management, 8, 2052-2060. doi: 10.4236/ajibm.2018.89135.

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