| This dissertation examines discretionary bonus payments by firms to senior-level executives. First, I investigate when discretionary bonus payments may occur in an optimal incentive contract using an analytical model. The primary hypothesis based on the model developed in this dissertation is that discretionary bonus payments occur when the outcome of the objective performance measure is either low or high, but not when the outcome of the objective measure falls in the medium range. The prediction regarding the occurrence of discretionary bonus payments is obtained in a conventional agency theory model. Second, I analyze the relationship between discretionary bonus payments and managerial power theory. Managerial power theory yields the prediction that there is a positive relationship between the occurrence of discretionary bonus payments and executive power.;I empirically test the two predictions using a sample collected from public sources. The data is collected by taking advantage of the recently updated SEC regulation regarding disclosure requirements in Forms 8-K.;In testing the hypotheses, I find evidence supporting the prediction from the model developed in the dissertation but only limited support for the prediction based on managerial power theory. In particular, discretionary bonus payments occur significantly more often and are higher when the objective performance falls in the tails of the distribution. Conversely, the results provide limited support for the hypothesis that there is a positive relationship between discretionary bonuses and the power of the executives in the companies. |
