A Theory of Fair CEO Pay

This paper studies executive pay with fairness concerns: if the CEO's wage falls below a perceived fair share of output, he suffers disutility that is increasing in the discrepancy. Fairness concerns do not always lead to fair wages; instead, the firm threatens the CEO with unfair wages for low output to induce effort. The contract sometimes involves performance-vesting equity: the CEO is paid a constant share of output if it is sufficiently high, and zero otherwise. Even without moral hazard, the contract features pay-for-performance, to address fairness concerns and ensure participation. This rationalizes pay-for-performance even if effort incentives are unnecessary.