Executive Compensation: The View from General Equilibrium

Jean-Pierre Danthine and John B. Donaldson
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John B. Donaldson: Columbia University

No 07-33, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: We study the dynamic general equilibrium of an economy where risk averse shareholders delegate the management of the ¯rm to risk averse managers. The optimal contract has two main components: an incentive component corresponding to a non-tradable equity position and a variable 'salary' component indexed to the aggregate wage bill and to aggregate dividends. Tying a manager's compensation to the performance of her own ¯rm ensures that her interests are aligned with the goals of ¯rm owners and that maximizing the discounted sum of future dividends will be her objective. Linking managers' compensation to overall economic performance is also required to make sure that managers use the appropriate stochastic discount factor to value those future dividends.

Keywords: incentives; optimal contracting; stochastic discount factor (search for similar items in EconPapers)
JEL-codes: E32 E44 (search for similar items in EconPapers)
Pages: 30 pages
Date: 2007-09
New Economics Papers: this item is included in nep-bec, nep-dge, nep-ltv and nep-mac
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http://ssrn.com/abstract=1020227 (application/pdf)

Related works:
Working Paper: Executive Compensation: The View from General Equilibrium (2007)
Working Paper: Executive Compensation: The View from General Equilibrium (2007)
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Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp0733

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