Optimal CEO Compensation: Some Equivalence Results

Chongwoo Choe

Journal of Labor Economics, 2006, vol. 24, issue 1, 171-201

Abstract: I study optimal managerial contracts in two contracting environments. When the investment return is contractible, an optimal contract combines a base salary, golden parachute, and bonus. When the return is not contractible, two types of optimal contracts are studied: a contract with restricted stock and a contract with stock options. These three types of contracts are equivalent: they implement the same outcome and lead to the same expected payoff for the manager, implying that the choice of contractual form is irrelevant in the environment I study. I suggest directions of research for the relevance of different contractual forms.

Date: 2006
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