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How Internal Transaction Costs Drive Compensation Schemes

Author

Listed:
  • Dominique Rouzies

    (GREGH - Groupement de Recherche et d'Etudes en Gestion à HEC - HEC Paris - Ecole des Hautes Etudes Commerciales - CNRS - Centre National de la Recherche Scientifique)

  • Erin Anderson

    (INSEAD - Institut Européen d'administration des Affaires)

  • Anne T. Coughlan

    (Kellogg [Northwestern] - Kellogg School of Management [Northwestern University, Evanston] - Northwestern University [Evanston])

Abstract

The literature on chief executive officers (CEOs) establishes that economic and sociological rationales are both essential to understand the level and structure of CEOs' compensation. Our thesis is that internal "transaction costs" or frictions override strictly economic criteria to determine pay levels and pay structures. We study mid-level jobs that have features strikingly similar to the CEO. We show that pay checks and their underlying structure follow counterintuitive patterns, as if the employer resorts to a third party (i.e., the customer base) to reduce employee discontent over pay. We also find that firms reward managers as if they have considerable value added.

Suggested Citation

  • Dominique Rouzies & Erin Anderson & Anne T. Coughlan, 2004. "How Internal Transaction Costs Drive Compensation Schemes," Working Papers hal-00587575, HAL.
    • Handle: RePEc:hal:wpaper:hal-00587575
    as

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