Reward for failure and executive compensation in institutional investors

Gino Loyola and Yolanda Portilla ()

Finance Research Letters, 2014, vol. 11, issue 4, 349-361

Abstract: We propose a model of delegated portfolio management specialized in alternative investments, i.e., those with a high-return and high-risk profile. It is shown that in this context, as a reward for risk-taking scheme is optimal, a counter-intuitive reward for failure can also be desirable. This property emerges because it can be optimal to compensate extreme returns (even low ones) to encouraging managers to shape highly innovative portfolios. It is argued that this structure resembles compensation practices questioned in the context of the last financial crisis, such as golden parachutes and golden coffins. Implementation via equity and bonuses is also analyzed.

Keywords: D86; G11; G20; G30; J33; M52; Executive compensation; Portfolio management; Corporate governance; Golden parachutes; Non-monotone likelihood ratio property (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:11:y:2014:i:4:p:349-361

DOI: 10.1016/j.frl.2014.09.001

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