Abstract
We show that long-term compensation is associated with higher pay in the financial industry and the legal sector. Then, using a detailed survey of law school graduates, we explore why firms use long-term compensation. We find that individuals with jobs that make them highly visible and that allow them to shift effort from tasks that are value-enhancing for the employer to tasks that are self-enhancing are more likely to receive long-term compensation, especially in markets with high competition for talent. High-ability individuals receive higher pay, but are not more likely to be awarded long-term compensation. These findings suggest that long-term compensation arises in an optimal contract, because competition for talent accentuates agency problems in the allocation of effort and may create retention problems.
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