Executive Compensation and Stock Options: An Inconvenient Truth

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

No 08-13, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: We reexamine the issue of executive compensation within a gen- eral equilibrium production context. Intertemporal optimality places strong restrictions on the form of a representative manager's compen- sation contract, restrictions that appear to be incompatible with the fact that the bulk of many high-proffile managers' compensation is in the form of various options and option-like rewards. We therefore measure the extent to which a convex contract alone can induce the manager to adopt near-optimal investment and hiring decisions. To ask this question is essentially to ask if such contracts can effectively align the stochastic discount factor of the manager with that of the shareholder-workers. We detail exact circumstances under which this alignment is possible and when it is not.

Keywords: corporate governance; optimal contracting; business cycles (search for similar items in EconPapers)
JEL-codes: E32 E44 (search for similar items in EconPapers)
Pages: 32 pages
Date: 2008-06
New Economics Papers: this item is included in nep-bec, nep-cta, nep-dge, nep-lab and nep-mac
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Working Paper: Executive Compensation and Stock Options: An Inconvenient Truth (2008)
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Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp0813

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