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The Complexity of CEO Compensation: Incentives and Learning

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  • Arantxa Jarque

    (Federal Reserve Bank of Richmond)

Abstract

I study what are the firm characteristics that may justify the use of options or refresher grants in the compensation packages for CEOs as part of an optimal contract in the presence of moral hazard. I model explicitly the determination of stock prices from the output realizations of the firm: Symmetric learning by all players about the exogenous quality of the firm makes stock prices sensitive to output observations. Compensation packages become an instrument to transform this sensitivity of prices to output into the optimal sensitivity of consumption to output that is dictated by the optimal contract. Heterogeneity in the structure of firm uncertainty implies that some firms are able to implement the optimal contract with very simple schemes that do not contain options, refresher grants, or perks, while others necessarily need to use these more complex and non--transparent instruments.

Suggested Citation

  • Arantxa Jarque, 2014. "The Complexity of CEO Compensation: Incentives and Learning," 2014 Meeting Papers 1355, Society for Economic Dynamics.
    • Handle: RePEc:red:sed014:1355
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    Cited by:

    1. Clementi, Gian Luca & Cooley, Thomas F. & Wang, Cheng, 2006. "Stock grants as a commitment device," Journal of Economic Dynamics and Control, Elsevier, vol. 30(11), pages 2191-2216, November.
    2. 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.
    3. Frédéric Teulon & Guillaume Bigot & Bernard Terrany & Negar Youssefian, 2016. "Rémunérations des PDG : toniques ou toxiques ? Une mise en perspective de la littérature," Post-Print hal-01865108, HAL.

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