Optimal Executive Compensation: Some Equivalence Results

Chongwoo Choe

No a419, Discussion Paper Series from Institute of Economic Research, Hitotsubashi University

Abstract: This paper studies optimal managerial contracts in two contracting environments. When contracts can be based on earnings, an optimal contract is interpreted as a combination of base salary, golden parachute and bonus. When earnings are not verifiable, two types of optimal contracts are derived: a contract with restricted stock ownership, and a contract with stock options. These three types of optimal contracts are payoff-equivalent in a strong sense: agents' ex ante and ex post payoffs are the same under all three contracts, implying that the choice of contractual form is irrelevant in the environment studied in this paper. This paper thus suggests directions of research for the relevance of different contractual forms.

Keywords: Optimal contract; executive compensation; bonus; golden parachutes; stock ownership; stock options (search for similar items in EconPapers)
JEL-codes: D82 G32 J33 (search for similar items in EconPapers)
Pages: 35 pages
Date: 2001-12
Note: Bibliography: p. 29-32
References: Add references at CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:hit:hituec:a419

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