Dynamic Incentives and Retirement

Journal of Accounting and Economics Volume 46, Issue 1, September 2008, Pages 172–200

University of Alberta School of Business Research Paper No. 2013-1092

Posted: 2 Jul 2013

See all articles by Florin Sabac

Florin Sabac

University of Alberta - Department of Accounting, Operations & Information Systems

Date Written: June 1, 2007

Abstract

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

Sabac, Florin, Dynamic Incentives and Retirement (June 1, 2007). Journal of Accounting and Economics Volume 46, Issue 1, September 2008, Pages 172–200, University of Alberta School of Business Research Paper No. 2013-1092, Available at SSRN: https://ssrn.com/abstract=2283321

Florin Sabac (Contact Author)

University of Alberta - Department of Accounting, Operations & Information Systems ( email )

Edmonton, Alberta T6G 2R6
Canada

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