European Business Schools Librarian's Group

HEC Research Papers Series,
HEC Paris

No 802: How Internal Transaction costs drive compensation schemes

Dominique ROUZIES (), Erin ANDERSON () and Anne T. COUGHLAN ()
Additional contact information
Erin ANDERSON: INSEAD
Anne T. COUGHLAN: Kellogg School of Management, Evanston

Abstract: The literature on chief executive officers (CEOs) established that economics 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.

Keywords: internal transaction costs; compensation; CEO

JEL-codes: J33; M31; M41

41 pages, October 1, 2004

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