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Are Top Management Teams Compensated as Teams? A Structural Modeling Approach

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  • Chen Li

    (New York University Shanghai, Shanghai 200122, China)

Abstract

I develop two empirical models to quantify agency friction caused by moral hazard in top management teams. They capture shareholders’ distinct perspectives on compensating top managers: the Individual Model , in which managers in a firm unilaterally shirk, and the Team Model , in which managers choose effort jointly. The Team Model rationalizes observed compensation better than the Individual Model , underlining the importance of managerial coordination and team-based incentives. This paper also offers novel estimates of agency friction in a team production setting. Risk premium explains a large portion of the pay differential across and within firms. Firm value would have dropped between 4% and 15% if managers shirked. Additional counterfactual estimation suggests that shareholders could reduce the total compensation by up to $17 million if they were to switch from the individual perspective to the team perspective.

Suggested Citation

  • Chen Li, 2024. "Are Top Management Teams Compensated as Teams? A Structural Modeling Approach," Management Science, INFORMS, vol. 70(12), pages 8753-8771, December.
    • Handle: RePEc:inm:ormnsc:v:70:y:2024:i:12:p:8753-8771
    DOI: 10.1287/mnsc.2024.4982
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