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Explaining the structure of CEO incentive pay with decreasing relative risk aversion

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  • Chaigneau, Pierre

Abstract

It is established that the standard principal-agent model cannot explain the structure of commonly used CEO compensation contracts if CRRA preferences are postulated. However, we demonstrate that this model has potentially a high explanatory power with preferences with decreasing relative risk aversion, in the sense that a typical CEO contract is approximately optimal for plausible preference parameters.

Suggested Citation

  • Chaigneau, Pierre, 2011. "Explaining the structure of CEO incentive pay with decreasing relative risk aversion," LSE Research Online Documents on Economics 119059, London School of Economics and Political Science, LSE Library.
    • Handle: RePEc:ehl:lserod:119059
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    File URL: http://eprints.lse.ac.uk/119059/
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    References listed on IDEAS

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    More about this item

    Keywords

    CEO pay; principal-agent model; corporate governance; stock-options;
    All these keywords.

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • M52 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects

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