ABSTRACT While compensation consultants are known to play an important role in the design of executive compensation contracts, evidence on the effect of consultant incentives on CEO pay is mixed. Using compensation consultant observations with mandatory fee disclosures, which a prior study identifies as an optimal pay setter, we examine whether CEO pay is associated with consultants' incentives to retain clients, measured by fees for executive compensation services. In contrast to previous studies that find no support for repeat business incentives, we find evidence that CEO pay is higher when consultants receive abnormally high fees, demonstrating a strong incentive to retain the client, and that this positive association occurs only in weakly governed firms. This finding highlights the importance of consultant incentives and corporate governance in executive compensation settings. JEL Classifications: M12; G34; G38. Data Availability: Data used in this study are publicly available.
We develop a model to analyze optimal product‐costing and pricing decisions in a dynamic information environment under long‐term‐capacity commitment. The arrival of new information about demand and cost parameters each period makes the problem complex. The optimal prices and capacity choices in our model cannot be decoupled as in Banker and Hughes' (1994) single‐period model. The optimal prices are based on product costs that are adjusted each period to reflect changes in expected variable costs as well as utilization of fixed activity resources. The charge for each fixed resource is monotonically increasing in the expected demand for that resource in each state given the optimal capacity choice. The average optimal prices across periods and states are similar to Banker and Hughes' (1994) benchmark prices. Finally, we investigate a two‐period version of the model to explore the optimality of carrying idle capacity. The optimal product‐cost charge for fixed capacity is strictly less in the first period than in the second period when the firm expects demand growth.