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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.
