How Much to Pay in Cash? Employee Retention via Stock Options

Ruslan Gurtoviy and Luis G. González

Papers on Strategic Interaction from Max Planck Institute of Economics, Strategic Interaction Group

Abstract: We model deferred compensation as a share of an uncertain future profit granted by a financially constrained employer to her employee in mutual agreement. Deferred compensation serves as a retention mechanism, helping the employer to avoid bankruptcy. The optimal combination of cash and deferred payments that a firm can use to retain qualified personnel depends on the cost of new credit and bank-ruptcy risk: If interest rates are greater (smaller) than the ex-ante odds of bankruptcy, the employer will to defer compensation (pay in cash) to the employee. The employee always improves his position in the labor market if imminent bankruptcy is avoided.

Keywords: Deferred Compensation; Employee Retention; Nash Bargaining (search for similar items in EconPapers)
JEL-codes: J32 J33 M12 M5 (search for similar items in EconPapers)
Pages: 24 pages
Date: 2008-08
New Economics Papers: this item is included in nep-fin and nep-lab
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