Executive Compensation: The View from General Equilibrium

29 Pages Posted: 5 Jun 2008

See all articles by Jean-Pierre Danthine

Jean-Pierre Danthine

University of Lausanne - Institute of Banking and Finance (IBF); Centre for Economic Policy Research (CEPR); Swiss Finance Institute

John B. Donaldson

Columbia Business School - Finance and Economics

Multiple version iconThere are 2 versions of this paper

Abstract

We study the dynamic general equilibrium of an economy where risk averse shareholders delegate the management of the firm to risk averse managers. The optimal contract has two main components: an incentive component corresponding to a non-tradable equity position and a variable 'salary' component indexed to the aggregate wage bill and to aggregate dividends. Tying a manager's compensation to the performance of her own firm ensures that her interests are aligned with the goals of firm owners and that maximizing the discounted sum of future dividends will be her objective. Linking managers' compensation to overall economic performance is also required to make sure that managers use the appropriate stochastic discount factor to value those future dividends.

Keywords: incentives, optimal contracting, stochastic discount factor

JEL Classification: E32, E44

Suggested Citation

Danthine, Jean-Pierre and Donaldson, John B., Executive Compensation: The View from General Equilibrium. CEPR Discussion Paper No. DP6555, Available at SSRN: https://ssrn.com/abstract=1140082

Jean-Pierre Danthine (Contact Author)

University of Lausanne - Institute of Banking and Finance (IBF) ( email )

Lausanne, 1015
Switzerland
+41 21 692 3485 (Phone)
+41 21 692 3335 (Fax)

HOME PAGE: http://www.hec.unil.ch/jdanthine/

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Swiss Finance Institute ( email )

c/o University of Geneve
40, Bd du Pont-d'Arve
1211 Geneva, CH-6900
Switzerland

John B. Donaldson

Columbia Business School - Finance and Economics ( email )

3022 Broadway
New York, NY 10027
United States

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
1
Abstract Views
417
PlumX Metrics