Stock Grants as a Committment Device
AbstractA 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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Bibliographic InfoPaper provided by New York University, Leonard N. Stern School of Business, Department of Economics in its series Working Papers with number 04-24.
Date of creation: 2004
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