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Stock Grants As a Commitment Device

Author

Listed:
  • Clementi, Gian Luca
  • Cooley, Thomas F.
  • Wang, Cheng

Abstract

A large and increasing fraction of the value of executives' compensation is accounted for by security grants. However, in most models of executive compensation, the optimal allocation can be implemented through a sequence of state-contingent cash payments. Security awards are redundant. In this paper we develop a dynamic model of managerial compensation where neither the firm nor the manager can commit to long-term contracts. We show that, in this environment, if stock grants are not used, then the optimal contract collapses to a series of short term contracts. When stock grants are used, however, nonlinear intertemporal schemes can be implemented to achieve better risk-sharing and higher firm value.

Suggested Citation

  • Clementi, Gian Luca & Cooley, Thomas F. & Wang, Cheng, 2006. "Stock Grants As a Commitment Device," Staff General Research Papers Archive 12300, Iowa State University, Department of Economics.
    • Handle: RePEc:isu:genres:12300
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    References listed on IDEAS

    as
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    22. Arantxa Jarque & Muth John, 2013. "Evaluating Executive Compensation Packages," Economic Quarterly, Federal Reserve Bank of Richmond, issue 4Q, pages 251-285.
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    Cited by:

    1. Lustig, Hanno & Syverson, Chad & Van Nieuwerburgh, Stijn, 2011. "Technological change and the growing inequality in managerial compensation," Journal of Financial Economics, Elsevier, vol. 99(3), pages 601-627, March.
    2. Vincenzo Quadrini & Ramon Marimon & Thomas Cooley, 2012. "Risky Investments with Limited Commitment," 2012 Meeting Papers 603, Society for Economic Dynamics.
    3. Amal Hili & Didier Laussel & Ngo Van Long, 2017. "Disentangling managerial incentives from a dynamic perspective: The role of stock grants," Pacific Economic Review, Wiley Blackwell, vol. 22(5), pages 743-771, December.
    4. Liyan Shi, 2023. "Optimal Regulation of Noncompete Contracts," Econometrica, Econometric Society, vol. 91(2), pages 425-463, March.
    5. Liyan Shi, 2021. "The Macro Impact of Noncompete Contracts," EIEF Working Papers Series 2103, Einaudi Institute for Economics and Finance (EIEF), revised 2021.
    6. Gian Luca Clementi & Thomas Cooley & Sonia Di Giannatale, 2010. "A Theory of Firm Decline," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 13(4), pages 861-885, October.
    7. Arantxa Jarque, 2008. "Optimal CEO compensation and stock options," Working Papers. Serie EC 2008-04, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
    8. Mele, Antonio, 2014. "Repeated moral hazard and recursive Lagrangeans," Journal of Economic Dynamics and Control, Elsevier, vol. 42(C), pages 69-85.
    9. Gian Luca Clementi & Thomas Cooley, 2023. "CEO Compensation: Facts," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 50, pages 6-27, October.
    10. Wang, Cheng, 1997. "Incentives, CEO Compensation, and Shareholder Wealth in a Dynamic Agency Model," Journal of Economic Theory, Elsevier, vol. 76(1), pages 72-105, September.
    11. Arantxa Jarque, 2008. "CEO compensation : trends, market changes, and regulation," Economic Quarterly, Federal Reserve Bank of Richmond, vol. 94(Sum), pages 265-300.
    12. M. Imtiaz Mazumder & Nazneen Ahmad, 2010. "Greed, financial innovation or laxity of regulation?," Studies in Economics and Finance, Emerald Group Publishing Limited, vol. 27(2), pages 110-134, June.
    13. Gian Luca Clementi & Thomas Cooley, 2009. "Executive Compensation: Facts," Working Paper series 46_09, Rimini Centre for Economic Analysis.
    14. Liyan Shi, 2019. "Restrictions on Executive Mobility and Reallocation: The Aggregate Effect of Non-Compete Contracts," 2019 Meeting Papers 852, Society for Economic Dynamics.
    15. Arantxa Jarque, 2014. "The Complexity of CEO Compensation," Working Paper 14-16, Federal Reserve Bank of Richmond.
    16. Arantxa Jarque & Muth John, 2013. "Evaluating Executive Compensation Packages," Economic Quarterly, Federal Reserve Bank of Richmond, issue 4Q, pages 251-285.

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