Benefits of Broad-based Option Pay
AbstractFuture wage payments drive a wedge between total firm output and the output share received by the firm’s owners, thus potentially distorting strategic decisions by the firm’s owners such as, e.g., whether to continue the firm, sell it, or shut it down. Using an optimal contracting approach, we show that the unique optimal firm-wide employee compensation scheme from this perspective is a broad-based option plan. Broad-based option pay minimizes the firm’s expected future wage payments in states of nature where the firm is only marginally profitable, thus making continuation as attractive as possible in precisely those states of nature where, e.g., a high fixed wage would lead the firm’s owners to inefficiently exit.
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Bibliographic InfoPaper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 4878.
Date of creation: Jan 2005
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Find related papers by JEL classification:
- J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
- J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
This paper has been announced in the following NEP Reports:
- NEP-ALL-2005-06-14 (All new papers)
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