Notes on ambiguity and executive compensation

Abstract

Executive compensation schemes are lotteries with very favorable expected returns, thus incentives for the ambitious to enter managerial careers. In addition, such schemes generally seek to provide greater rewards for those managers whose presence has been associated with measured organizational success. Ambiguity makes discriminating reliably among managers on the basis of organizational outcomes quite problematic, particularly at the top. As a result, executive compensation schemes that emphasize discrimination among executives on the basis of performance are likely to stimulate the management of accounts and reputations, rather than organizations. At the same time, they help sustain myths of managerial importance.