A large and increasing fraction of the value of executives' compensation is accounted for by security grants. However, in most models of executive compensation, the optimal allocation can be implemented through a sequence of state-contingent cash payments. Security awards are redundant. In this paper we develop a dynamic model of managerial compensation where neither the firm nor the manager can commit to long-term contracts. We show that, in this environment, if stock grants are not used, then the optimal contract collapses to a series of short term contracts. When stock grants are used, however, nonlinear intertemporal schemes can be implemented to achieve better risk-sharing and higher firm value.
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Publisher Info
Paper provided by Iowa State University, Department of Economics in its series Staff General Research Papers with number
12300.
Length: 26 pages Date of creation: 26 Apr 2005 Date of revision: Publication status: Published in Journal of Economic Dynamics and Control, November 2006, Vol. 30, No. 11, pp. 2191-2216. Handle: RePEc:isu:genres:12300
Contact details of provider: Postal: Iowa State University, Dept. of Economics, 260 Heady Hall, Ames, IA 50011-1070 Phone: +1 515.294.6741 Fax: +1 515.294.0221 Email: Web page: http://www.econ.iastate.edu More information through EDIRC
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Gian Luca Clementi & Thomas Cooley & Chen Wang, 2004.
"Stock Grants as a Committment Device,"
Working Papers
04-24, New York University, Leonard N. Stern School of Business, Department of Economics.
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Find related papers by JEL classification: D2 - Microeconomics - - Production and Organizations D8 - Microeconomics - - Information, Knowledge, and Uncertainty G3 - Financial Economics - - Corporate Finance and Governance
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