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The Optimal Timing of CEO Compensation

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  • Pierre Chaigneau
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    Abstract

    This paper extends a standard principal-agent model of CEO compensation by modeling the progressive attenuation of information asymmetries between firm insiders and shareholders in continuous time. In this setting, we show that the optimal timing of compensation results from a tradeoff between the progressive accumulation of noise in the stock price process and the progressive resolution of information asymmetries. Since all points in the stock price process are incrementally informative about the CEO action, we also show that the whole stock price process should a priori be used for compensation purposes. This may however lead CEOs to inefficiently divert resources to repeatedly manipulate the stock price, which is why it might be optimal to use only a few points in the stock price process instead.

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    File URL: http://www.cirpee.org/fileadmin/documents/Cahiers_2012/CIRPEE12-07.pdf
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    Bibliographic Info

    Paper provided by CIRPEE in its series Cahiers de recherche with number 1207.

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    Date of creation: 2012
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    Handle: RePEc:lvl:lacicr:1207

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    Related research

    Keywords: Executive compensation; principal-agent problem; short-termism; stock-options; deferred compensation; vesting;

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