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Optimal Executive Compensation: Some Equivalence Results

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Author Info
Chongwoo Choe

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Abstract

This paper studies optimal managerial contracts in two contracting environments. When contracts can be based on earnings, an optimal contract is interpreted as a combination of base salary, golden parachute and bonus. When earnings are not verifiable, two types of optimal contracts are derived: a contract with restricted stock ownership, and a contract with stock options. These three types of optimal contracts are payoff-equivalent in a strong sense: agents ex ante and ex post payoffs are the same under all three contracts, implying that the choice of contractual form is irrelevant in the environment studied in this paper. This paper thus suggests directions of research for the relevance of different contractual forms.

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Paper provided by Institute of Economic Research, Hitotsubashi University in its series Discussion Paper Series with number a419.

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Date of creation: Dec 2001
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Handle: RePEc:hit:hituec:a419

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Related research
Keywords: Optimal contract; executive compensation; bonus; golden parachutes; stock ownership; stock options;

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Find related papers by JEL classification:
D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information
G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Capital and Ownership Structure
J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods

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