The effect of risk preferences on the valuation and incentives of compensation contracts
We use a comparative approach to study the incentives provided by di erent types of compensation contracts, and their valuation by risk averse managers, in a fairly general setting. We show that concave contracts tend to provide more incentives to risk averse managers, while convex contracts tend to be more valued by prudent managers. Thus, prudence can contribute to explain the prevalence of stock-options in executive compen- sation. We also present a condition on the utility function which enables to compare the structure of optimal contracts associated with di erent risk preferences.
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Ingolf Dittmann & Ernst Maug, 2007. "Lower Salaries and No Options? On the Optimal Structure of Executive Pay," Journal of Finance, American Finance Association, vol. 62(1), pages 303-343, 02.
- Stephen A. Ross, 2004. "Compensation, Incentives, and the Duality of Risk Aversion and Riskiness," Journal of Finance, American Finance Association, vol. 59(1), pages 207-225, 02.
- Martin Browning & Annamaria Lusardi, 1995.
"Household Saving: Micro Theories and Micro Facts,"
Department of Economics Working Papers
1995-02, McMaster University.
- Hall, Brian J. & Murphy, Kevin J., 2002.
"Stock options for undiversified executives,"
Journal of Accounting and Economics,
Elsevier, vol. 33(1), pages 3-42, February.
- Pierre Chaigneau, 2011.
"Explaining the Structure of CEO Incentive Pay with Decreasing Relative Risk Aversion,"
FMG Discussion Papers
dp693, Financial Markets Group.
- Chaigneau, Pierre, 2013. "Explaining the structure of CEO incentive pay with decreasing relative risk aversion," Journal of Economics and Business, Elsevier, vol. 67(C), pages 4-23.
- Pierre Chaigneau, 2012. "Explaining the Structure of CEO Incentive Pay with Decreasing Relative Risk Aversion," Cahiers de recherche 1208, CIRPEE.
- Kraus, Alan & Litzenberger, Robert H, 1976. "Skewness Preference and the Valuation of Risk Assets," Journal of Finance, American Finance Association, vol. 31(4), pages 1085-1100, September.
- Scott, Robert C & Horvath, Philip A, 1980. " On the Direction of Preference for Moments of Higher Order Than the Variance," Journal of Finance, American Finance Association, vol. 35(4), pages 915-19, September.
- Sanford Grossman & Oliver Hart, .
"An Analysis of the Principal-Agent Problem,"
Rodney L. White Center for Financial Research Working Papers
15-80, Wharton School Rodney L. White Center for Financial Research.
- Keenan, Donald C. & Snow, Arthur, 2010. "Greater prudence and greater downside risk aversion," Journal of Economic Theory, Elsevier, vol. 145(5), pages 2018-2026, September.
- Maug, Ernst & Dittmann, Ingolf, 2007.
"Lower salaries and no options : the optimal structure of executive pay
[Lower salaries and no options? On the optimal structure of executive pay]," Papers 07-41, Sonderforschungsbreich 504.
- Gourinchas, Pierre-Olivier & Parker, Jonathan A, 2001.
"The Empirical Importance of Precautionary Saving,"
CEPR Discussion Papers
2737, C.E.P.R. Discussion Papers.
- Jenter, Dirk, 2004.
"Executive Compensation, Incentives, and Risk,"
4466-02, Massachusetts Institute of Technology (MIT), Sloan School of Management.
- Ingolf Dittmann & Ernst Maug & Oliver Spalt, 2010. "Sticks or Carrots? Optimal CEO Compensation when Managers Are Loss Averse," Journal of Finance, American Finance Association, vol. 65(6), pages 2015-2050, December.
- Maug, Ernst & Dittmann, Ingolf, 2007. "Lower Salaries and No Options: The Optimal Structure of Executive Pay," Sonderforschungsbereich 504 Publications 07-41, Sonderforschungsbereich 504, Universität Mannheim;Sonderforschungsbereich 504, University of Mannheim.
When requesting a correction, please mention this item's handle: RePEc:fmg:fmgdps:dp697. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (The FMG Administration)
If references are entirely missing, you can add them using this form.