THE COMPLEXITY OF COMPENSATION CONTRACTS

Management compensation is often categorized as either sensitive or in sensitive to firm performance. This one-dimensional treatment ignores the variation in the types and terms of compensation contracts. Throug h 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 c haracteristics of the assets being managed. This variation in compensa tion contracting challenges theorists to incorporate the richness of m anagement contracts into models of incentive pay.