Managerial bargaining power in the determination of compensation contractsand corporate investment

This paper considers the design of managerial compensation contracts and th eir impact on corporate investment decisions and the managerial effort deci sion. The model relates the compensation scheme to outside share ownership and managerial bargaining position. Using the methods of mechanism design u nder asymmetric information, a shift in favor of effort is documented in th e case where managerial bargaining strength is weak, while a shift toward m ore use of capital investment results from strong managerial bargaining pow er. The model distinguishes managerial equity holdings from contingent comp ensation contracts. Our results are related to the empirical literature on pay-performance sensitivities.