How to Pay Envious Managers – a Theoretical Analysis

Authors


  • We are grateful to John Doukas (the editor) for his valuable suggestions as well as two anonymous referees for the in-depth comments, which significantly improved the paper. We also thank participants of the GEABA conference Graz, DGF annual meeting Hannover, Workshop Financial Markets & Risk Obergurgl and WHU campus for finance for their helpful remarks.

Abstract

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.

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