The complexity of compensation contracts

Management compensation is often categorized as either sensitive or insensitive to firm performance. This one-dimensional treatment ignores the variation in the types and terms of compensation contracts. Through a cross-sectional examination of shareholder-authorized compensation arrangements, this paper demonstrates that the terms of stock option and restricted stock plans, and the flexibility afforded the board of directors in negotiating with managers, vary systematically with the characteristics of the assets being managed. This variation in compensation contracting challenges theorists to incorporate the richness of management contracts into models of incentive pay.