Stock Grants As a Commitment Device

Gian Luca Clementi, Thomas Cooley and Cheng Wang

Staff General Research Papers Archive from Iowa State University, Department of Economics

Abstract: A large and increasing fraction of the value of executives' compensation is accounted for by security grants. However, in most models of executive compensation, the optimal allocation can be implemented through a sequence of state-contingent cash payments. Security awards are redundant. In this paper we develop a dynamic model of managerial compensation where neither the firm nor the manager can commit to long-term contracts. We show that, in this environment, if stock grants are not used, then the optimal contract collapses to a series of short term contracts. When stock grants are used, however, nonlinear intertemporal schemes can be implemented to achieve better risk-sharing and higher firm value.

Date: 2006-11-01
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Published in Journal of Economic Dynamics and Control, November 2006, vol. 30 no. 11, pp. 2191-2216

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Related works:
Journal Article: Stock grants as a commitment device (2006)
Working Paper: Stock Grants as a Committment Device (2004)
Working Paper: Stock Grants as Commitment Device
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