Options in Compensation: Promises and Pitfalls

Christian Riis Flor, Hans Frimor, Claus Munk

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Abstrakt

We derive the optimal compensation contract in a principal–agent setting in which outcome is used to provide incentives for both effort and risky investments. To motivate investment, optimal compensation entails rewards for high as well as low outcomes, and it is increasing at the mean outcome to motivate effort. If rewarding low outcomes is infeasible, compensation consisting of stocks and options is a near-efficient means of overcoming the manager's induced aversion to undertaking risky investments, whereas stock compensation is not. However, stock plus option compensation may induce excessively risky investments, and capping pay can be important in curbing such behavior.
OriginalsprogEngelsk
TidsskriftJournal of Accounting Research
Vol/bind52
Udgave nummer3
Sider (fra-til)703-732
ISSN0021-8456
DOI
StatusUdgivet - 2014

Emneord

  • Compensation management
  • Agency Theory
  • Investment risk
  • Stock options
  • Wages - Government policy
  • Corporate governance
  • Global Financial Crisis, 2008-2009
  • Motivation (Psychology)

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