EconPapers    
Economics at your fingertips  
 

Executive Pay, Innovation, and Risk‐Taking

Volker Laux

Journal of Economics & Management Strategy, 2015, vol. 24, issue 2, 275-305

Abstract: This paper analyzes the optimal equity pay mix in a setting in which executives face career concerns and must be motivated to search for innovative investment ideas and to make appropriate decisions regarding whether to pursue the uncovered idea. I show that, depending on the value of the firm's potential growth opportunities and the CEO's concern about being fired, the CEO is either tempted to overinvest in risky ideas (excessive risk‐taking) or underinvest in risky ideas (excessive conservatism). The optimal pay package consists of stock options, to encourage the discovery of innovative ideas, and either restricted stock, to combat excessive risk‐taking, or severance pay, to combat excessive conservatism. The model provides new empirical predictions relating executive pay arrangements to the importance of innovation and career concerns and analyzes how the change in the economic environment caused by the current financial crisis might change the optimal mix of stock options, restricted stock, and severance pay.

Date: 2015
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (11)

Downloads: (external link)
https://doi.org/10.1111/jems.12090

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:bla:jemstr:v:24:y:2015:i:2:p:275-305

Ordering information: This journal article can be ordered from
http://www.blackwell ... ref=1058-6407&site=1

Access Statistics for this article

More articles in Journal of Economics & Management Strategy from Wiley Blackwell
Bibliographic data for series maintained by Wiley Content Delivery ().

 
Page updated 2025-03-19
Handle: RePEc:bla:jemstr:v:24:y:2015:i:2:p:275-305