The Optimal Timing of CEO Compensation

Pierre Chaigneau

Cahiers de recherche from CIRPEE

Abstract: This paper extends a standard principal-agent model of CEO compensation by modeling the progressive attenuation of information asymmetries between firm insiders and shareholders in continuous time. In this setting, we show that the optimal timing of compensation results from a tradeoff between the progressive accumulation of noise in the stock price process and the progressive resolution of information asymmetries. Since all points in the stock price process are incrementally informative about the CEO action, we also show that the whole stock price process should a priori be used for compensation purposes. This may however lead CEOs to inefficiently divert resources to repeatedly manipulate the stock price, which is why it might be optimal to use only a few points in the stock price process instead.

Keywords: Executive compensation; principal-agent problem; short-termism; stock-options; deferred compensation; vesting (search for similar items in EconPapers)
JEL-codes: G34 J33 M52 (search for similar items in EconPapers)
Date: 2012
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

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Journal Article: The optimal timing of CEO compensation (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:lvl:lacicr:1207

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