Indexing Executive Compensation Contracts

Maug, Ernst G.; Dittmann, Ingolf; Spalt, Oliver G.

doi:10.2139/ssrn.1876765

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Indexing Executive Compensation Contracts

Review of Financial Studies, Vol. 26, 3182-3224, 2013.

ECGI - Finance Working Paper No. 309/2011

65 Pages Posted: 5 Jul 2011 Last revised: 24 Feb 2021

See all articles by Ernst G. Maug

Ernst G. Maug

University of Mannheim Business School; European Corporate Governance Institute (ECGI)

Ingolf Dittmann

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE); Tinbergen Institute; Erasmus Research Institute of Management (ERIM); European Corporate Governance Institute (ECGI)

Oliver G. Spalt

University of Mannheim - Business School; European Corporate Governance Institute (ECGI)

Date Written: April 25, 2013

Abstract

We analyze the efficiency of indexing executive pay by calibrating the standard
model of executive compensation to a large sample of US CEOs. The benefits
from linking the strike price of stock options to an index are small and fully indexing
all options would increase compensation costs by about 50% for most firms.
Indexing has several effects with overall ambiguous impact; the quantitatively
most important effect is to reduce incentives, because indexed options pay off
when CEOs’ marginal utility is low. The results also hold if CEOs can extract rents
and extend to the case of indexing shares.

Keywords: executive compensation, indexed options, relative performance evaluation, pay for luck

JEL Classification: G30, M52

Suggested Citation: Suggested Citation

Maug, Ernst G. and Dittmann, Ingolf and Spalt, Oliver G., Indexing Executive Compensation Contracts (April 25, 2013). Review of Financial Studies, Vol. 26, 3182-3224, 2013., ECGI - Finance Working Paper No. 309/2011, Available at SSRN: https://ssrn.com/abstract=1876765 or http://dx.doi.org/10.2139/ssrn.1876765