EXECUTIVE COMPENSATION AND MACROECONOMIC FACTORS: INTEREST RATES AND CORPORATE TAXATION

Lawrence P. Schrenk

Global Journal of Business Research, 2008, vol. 2, issue 1, 125-135

Abstract: It is frequently argued that effective executive compensation should contain some performance-based remuneration. We lack, however, serious understanding of the characteristics of the many patterns of variable compensation in use. It is too often assumed that these different methods of compensation are (at least approximate) substitutes. In this paper, we develop a simulation model of executive compensation, in which both equity and option compensation is utilized, in order to analyze the effect of macroeconomic factors, namely, interest rates and the level of corporate taxation, on optimal executive compensation. The model forecasts that, as the risk free rate of interest increases, there is a general shift toward equity compensation; by contrast, as the level of corporate taxation increases the shift is toward option compensation.

JEL-codes: G30 H2 H25 J33 (search for similar items in EconPapers)
Date: 2008
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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