How to Pay Envious Managers – a Theoretical Analysis

This paper analyses how envy affects the decisions of competing managers and their optimal stock†based compensation from the perspective of shareholder value. We consider a typical framework in which managers can induce effort to reduce production costs and make decisions regarding production volume. At first glance, envy between managers from competing firms appears to be an unfavorable characteristic because it does not align the interests of managers with those of shareholders. However, our model finds that envy is a powerful incentive mechanism. The model yields three key findings: (i) envious managers outperform self†interested managers, (ii) firms optimally hire envious managers, and (iii) shareholders do not grant any stock†based compensation to envious managers.