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Dynamic incentives and retirement

  • Sabac, Florin
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    This paper examines multi-period compensation contracts when retirement is anticipated. Short-term contracts in long-term employment relationships are equivalent to a long-term renegotiation-proof contract. The dynamic of incentive rates is determined by (i) how and in which periods managerial effort affects the contractible performance measures; and by (ii) the time-series correlation of error terms in performance reports. The model explains why long-term investments can decrease while incentive rates increase as managers approach retirement. Earnings persistence is negatively associated to earnings-based incentive rates but, towards retirement, high earnings persistence implies increasing earnings-based incentive rates.

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    File URL: http://www.sciencedirect.com/science/article/B6V87-4RDR17N-1/2/9054d96258ee09caec0bebd67b98aff2
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    Article provided by Elsevier in its journal Journal of Accounting and Economics.

    Volume (Year): 46 (2008)
    Issue (Month): 1 (September)
    Pages: 172-200

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    Handle: RePEc:eee:jaecon:v:46:y:2008:i:1:p:172-200
    Contact details of provider: Web page: http://www.elsevier.com/locate/jae

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