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The Optimal Timing of Executive Compensation

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  • Pierre Chaigneau

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Abstract

We propose a new continuous-time principal-agent model to study the optimal timing of stock-based incentives, when the effects of managerial actions materialize with a lag and are only progressively understood by shareholders. On the one hand, early contingent compensation hedges the manager against the accumulation of exogenous shocks. On the other hand, the fact that initial information asymmetries between the manager and shareholders are progressively resolved suggests that contingent compensation should be postponed. We introduce two possible types of managerial short-termism, and show that they both result in lower-powered incentives and more deferred compensation.

Suggested Citation

  • Pierre Chaigneau, 2010. "The Optimal Timing of Executive Compensation," FMG Discussion Papers dp660, Financial Markets Group.
  • Handle: RePEc:fmg:fmgdps:dp660
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    File URL: http://www.lse.ac.uk/fmg/workingPapers/discussionPapers/DP660_2010_Theoptimaltimingofexecutivecompensation.pdf
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    References listed on IDEAS

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