Faculty of Economics and Business Administration Publications Database

How to Pay Envious Managers – A Theoretical Analysis

Doll, Tilmann
Koziol, Christian
Volume: 21
Number: 4
Pages: 811 - 832
Month: September
ISSN-Print: 1354-7798
Link External Source: Online Version
Year: 2015
Keywords: Executive compensation; Inequity aversion; Cournot competition

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.