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The Optimal Timing of Executive Compensation

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  • Pierre Chaigneau

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    Abstract

    We propose a new continuous-time principal-agent model to study the optimal timing of stock-based incentives, when the effects of managerial actions materialize with a lag and are only progressively understood by shareholders. On the one hand, early contingent compensation hedges the manager against the accumulation of exogenous shocks. On the other hand, the fact that initial information asymmetries between the manager and shareholders are progressively resolved suggests that contingent compensation should be postponed. We introduce two possible types of managerial short-termism, and show that they both result in lower-powered incentives and more deferred compensation.

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    File URL: http://www.lse.ac.uk/fmg/workingPapers/discussionPapers/DP660_2010_Theoptimaltimingofexecutivecompensation.pdf
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    Bibliographic Info

    Paper provided by Financial Markets Group in its series FMG Discussion Papers with number dp660.

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    Date of creation: Aug 2010
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    Handle: RePEc:fmg:fmgdps:dp660

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    Web page: http://www.lse.ac.uk/fmg/

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