Dynamic Incentives and Retirement
Journal of Accounting and Economics Volume 46, Issue 1, September 2008, Pages 172–200
Posted: 2 Jul 2013
Date Written: June 1, 2007
This paper examines multi-period compensation contracts when retirement is anticipated. Short-term contracts in long-term employment relationships are equivalent to a long-term renegotiation-proof contract. The dynamic of incentive rates is determined by (i) how and in which periods managerial effort affects the contractible performance measures; and by (ii) the time-series correlation of error terms in performance reports. The model explains why long-term investments can decrease while incentive rates increase as managers approach retirement. Earnings persistence is negatively associated to earnings-based incentive rates but, towards retirement, high earnings persistence implies increasing earnings-based incentive rates.
Keywords: Executive compensation, Turnover, Retirement, Horizon problem, Renegotiation
JEL Classification: D86, D90, J31, J33, M41, M51, M52
Suggested Citation: Suggested Citation