Milgrom and Roberts (1992): Chapter 13 Economics, Organization & Management Chapter 13: Executive and Managerial Compensation Managers who have human capital in a firm may be risk-averse. Giving stock options to managers, which rewards them for making positive NPV investments may offset some of this risk aversion. To avoid accepting too many risky projects, the company may need to have different groups approve a decision.

Milgrom and Roberts (1992): Chapter 13 Economics, Organization & Management Deferred compensation formulas, where payments are tied to the firm’s future performance will help encourage managers to take a long-term view rather than to concentrate excessively on short-term results. Payment in stock that cannot be sold immediately or in options that cannot be exercised before a certain date would be examples. This is the essence of the plans adopted by Salomon Brothers.

Milgrom and Roberts (1992): Chapter 13 Economics, Organization & Management A major debate concerns the pay received by CEOs of large U.S. firms. Some observers see them as the outcome of managerial greed. Others worry that executives are not paid enough to attract the best talent corporations rather than to such fields as investment banking, consulting and entrepreneurship. Another concern is that there are not sufficient financial incentives to solve agency problems between managers and shareholders.