Dynamic incentives and retirement

Florin Sabac

Journal of Accounting and Economics, 2008, vol. 46, issue 1, 172-200

Abstract: This paper examines multi-period compensation contracts when retirement is anticipated. Short-term contracts in long-term employment relationships are equivalent to a long-term renegotiation-proof contract. The dynamic of incentive rates is determined by (i) how and in which periods managerial effort affects the contractible performance measures; and by (ii) the time-series correlation of error terms in performance reports. The model explains why long-term investments can decrease while incentive rates increase as managers approach retirement. Earnings persistence is negatively associated to earnings-based incentive rates but, towards retirement, high earnings persistence implies increasing earnings-based incentive rates.

Keywords: Executive; compensation; Turnover; Retirement; Horizon; problem; Renegotiation (search for similar items in EconPapers)
Date: 2008
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jaecon:v:46:y:2008:i:1:p:172-200

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