TITLE

Dynamic CEO Compensation

AUTHOR(S)
EDMANS, ALEX; GABAIX, XAVIER; SADZIK, TOMASZ; SANNIKOV, YULIY
PUB. DATE
October 2012
SOURCE
Journal of Finance (John Wiley & Sons, Inc.);Oct2012, Vol. 67 Issue 5, p1603
SOURCE TYPE
Academic Journal
DOC. TYPE
Article
ABSTRACT
We study optimal compensation in a dynamic framework where the CEO consumes in multiple periods, can undo the contract by privately saving, and can temporarily inflate earnings. We obtain a simple closed-form contract that yields clear predictions for how the level and performance sensitivity of pay vary over time and across firms. The contract can be implemented by escrowing the CEO's pay into a 'Dynamic Incentive Account' that comprises cash and the firm's equity. The account features state-dependent rebalancing to ensure its equity proportion is always sufficient to induce effort, and time-dependent vesting to deter short-termism.
ACCESSION #
79958353

 

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