Managerial Compensation Schemes with Informed Principals

The paper studies managerial compensation schemes for suituations, where the current management knows more about the company's expected profitability than the new employee. When a manager is offered a contract with only a low fixed salary but high profit participation, he will be afraid that the company's profit outlook may be quite bad. Employers are aware of this. In Equilibrium the high profit employers will offer their new managers high fixed salaries and low profit participations.