Dynamic Incentive Accounts

Alex Edmans, Xavier Gabaix, Tomasz Sadzik and Yuliy Sannikov
Additional contact information
Tomasz Sadzik: NYU
Yuliy Sannikov: Princeton University

Working Papers from University of Pennsylvania, Wharton School, Weiss Center

Abstract: We study optimal executive compensation in a dynamic framework that incorporates many important features of the CEO job absent from a static setting. Shocks to firm value may weaken the incentive effects of securities over time (e.g. drive options out of the money). The CEO can undo the contract by privately saving, and temporarily manipulate the stock price. Despite the complex setup, we obtain a simple closed-form contract. It can be implemented by a "Dynamic Incentive Account": the CEO's expected pay is escrowed into an account, a fraction of which is invested in the firm's stock and the remainder in cash. The account features state-dependent rebalancing and time-dependent vesting. If the stock price falls, cash in the account is used to buy additional shares. Unlike the repricing of options, this re-incentivization does not come for free and so the CEO is not rewarded for failure. The account vests gradually both during the CEO's employment and after he quits, to deter short-termist actions before retirement.

JEL-codes: D20 D30 G34 J30 (search for similar items in EconPapers)
Date: 2010-05
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

Downloads: (external link)
http://fic.wharton.upenn.edu/fic/papers/10/10-19.pdf
Our link check indicates that this URL is bad, the error code is: 404 Not Found (http://fic.wharton.upenn.edu/fic/papers/10/10-19.pdf [301 Moved Permanently]--> https://wifpr.wharton.upenn.edu/fic/papers/10/10-19.pdf)

Related works:
Working Paper: Dynamic Incentive Accounts (2010)
Working Paper: Dynamic Incentive Accounts (2009)
Working Paper: Dynamic Incentive Accounts (2009)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ecl:upafin:10-19

Access Statistics for this paper

More papers in Working Papers from University of Pennsylvania, Wharton School, Weiss Center Contact information at EDIRC.
Bibliographic data for series maintained by ().