32 Pages Posted: 2 Feb 2005
This paper studies optimal managerial contracts in two contracting environments. When contracts can be based on the return from the investment, an optimal contract is interpreted as a combination of base salary, golden parachute and bonus. When the return is not verifiable, two types of optimal contracts are studied: a contract with restricted stock ownership and a contract with stock options. These three types of optimal contracts are shown to be equivalent: they all implement the same outcome and result in the same expected payoff for the manager, implying that the choice of contractual form is irrelevant in the environment studied in this paper. This paper thus suggests directions of research for the relevance of different contractual forms.
Keywords: Optimal contract, executive compensation, bonus, golden parachutes, restricted stock, stock options
JEL Classification: D82, G32, J33
Suggested Citation: Suggested Citation
Choe, Chongwoo, Optimal CEO Compensation: Some Equivalence Results. Journal of Labor Economics, Vol. 24, No. 1, pp. 171-201, January 2006. Available at SSRN: https://ssrn.com/abstract=658641
By Kevin Murphy