Determinants of management compensation with risk-averse agents and dispersed ownership of the firm

The salaries of top managers consist of two parts: one part depending on pr ofits, the other being constant. In a model of management compensation sche mes with risk averse agents, Holmstrom and Milgrom (1987) predict that an i ncreasing variance in profits should reduce the profit-relatedness of salar ies. Using data from Germany, we show that indeed a larger variance of prof its reduces the pay-performance sensitivity. Moreover, we analyze the relat ive influence of profits as compared to firm size on managerial compensatio n in general as well as the relationship between pay-performance sensitivit y and ownership structure. (C) 1999 Elsevier Science B.V. All rights reserv ed. JEL classification: G14; L21; L22.