Gibbons, Robert. <br/><br/>
Optimal Incentive Contracts in the Presence of Career Concerns:  Theory  and Evidence / 
Robert Gibbons, Kevin J. Murphy. 
 - Cambridge, Mass.  National Bureau of Economic Research  1991. 
 - 1 online resource:  illustrations (black and white); 
 - NBER working paper series  no. w3792 .
 - Working Paper Series (National Bureau of Economic Research)  no. w3792. .
<br/><br/> July 1991. 
<br/><br/> This paper studies career concerns -- concerns about the effects of current performance on future compensation -- and describes how optimal incentive contracts are affected when career concerns are taken into account. Career concerns arise frequently: they occur whenever the market uses a worker's current output to update its belief about the worker's ability and competition then forces future wages (or wage contracts) to reflect these updated beliefs. Career concerns are stronger when a worker is further from retirement, because a longer prospective career increases the return to changing the market's belief. In the presence of career concerns, the optimal compensation contract optimizes total incentives -- the combination of the implicit incentives from career concerns and the explicit incentives from the compensation contract. Thus, the explicit incentives from the optimal compensation contract should be strongest when a worker is close to retirement. We find empirical support for this prediction in the relation between chief-executive compensation and stock-market performance. 
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