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Executive Compensation and the Optimality of Managerial Entrenchment

  • Gary Gorton
  • Bruce D. Grundy

Firms are more complicated than standard principal-agent theory allows: firms have assets-in-place; firms endure through time, allowing for the possibility of replacing a shirking manager; firms have many managers, constraining the amount of equity that can be awarded to any one manager; and, a firm's owner can transfer some control to a manager, thereby entrenching her. Recognizing these characteristics, we solve for the vesting dates; wage, equity and options components; and control rights of an optimal contract. Managerial entrenchment makes the promise of deferred compensation credible. Deferring compensation by delaying vesting reduces a manager's ability to free-ride on a replacement's effort.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 5779.

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Date of creation: Sep 1996
Date of revision:
Handle: RePEc:nbr:nberwo:5779
Note: CF
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