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Optimal CEO Compensation: Some Equivalence Results

  • Chongwoo Choe

    (University of New South Wales)

I study optimal managerial contracts in two contracting environments. When the investment return is contractible, an optimal contract combines a base salary, golden parachute, and bonus. When the return is not contractible, two types of optimal contracts are studied: a contract with restricted stock and a contract with stock options. These three types of contracts are equivalent: they implement the same outcome and lead to the same expected payoff for the manager, implying that the choice of contractual form is irrelevant in the environment I study. I suggest directions of research for the relevance of different contractual forms.

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Article provided by University of Chicago Press in its journal Journal of Labor Economics.

Volume (Year): 24 (2006)
Issue (Month): 1 (January)
Pages: 171-201

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Handle: RePEc:ucp:jlabec:v:24:y:2006:i:1:p:171-201
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