Incentives, Learning, and Compensation: A Theoretical and Empirical Investigation of Managerial Labor Contracts

Abstract

This article analyzes properties and implications of multiperiod managerial labor contracts under two alternative hypotheses: incentives, in which productivity depends on unobservable effort, and learning, in which ability is unknown and is revealed over time. Shared and conflicting implications of these competing models are developed in terms of experience-earnings profiles and the relation between compensation and performance. I empirically examine these theoretical results by using a longitudinal sample of 1, 488 chief executive officers followed from 1974-1985. The data yield mixed evidence that generally supports the learning hypothesis over the incentive hypothesis.