Note on the Calibration of Executive Compensation Models
17 Pages Posted: 5 Jul 2011 Last revised: 26 Jul 2016
Date Written: September 17, 2011
This note is intended for researchers who want to implement the Dittmann and Maug (2007) calibration method. This method allows to test a complete principal-agent model with individual-level data on executive pay. The method consists of two steps. First, the principal-agent model is simplified so that it can be calibrated to the data for an individual CEO. After that, the calibrated model yields predictions about the optimal contract of this CEO, and these predictions can then be compared to observed contracts. This note contains step-by-step instructions on how to replicate the core results of Dittmann and Maug (2007) and Dittmann, Maug, and Spalt (2010). We report intermediate results for an example CEO, so that different parts of the program code can be tested individually.
Keywords: Stock Options, Executive Compensation, Loss Aversion
JEL Classification: G30, M52
Suggested Citation: Suggested Citation