Compensation not only provides incentives to existing managers but attracts new managers to the firm. This paper examines the dual incentive and sorting effects of performance pay in a simple contracting model of endogenous participation. The main result is that sorting dampens optimal...

Compensation not only provides incentives to an existing manager, but also affects the type of manager attracted to the firm. This paper examines the dual incentive and sorting effects of performance pay in a simple contracting model of endogenous participation. In general, sorting dampens...