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Optimal CEO Compensation: Some Equivalence Results

32 Pages Posted: 2 Feb 2005  

Chongwoo Choe

Monash University - Department of Economics

Abstract

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

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

Chongwoo Choe (Contact Author)

Monash University - Department of Economics ( email )

Department of Economics
PO Box 197
Caulfield East, Victoria 3145
Australia
+61 2 9903 1125 (Phone)
+61 2 9903 1128 (Fax)

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