Executive Compensation and the Optimality of Managerial Entrenchment
Rodney L. White Center for Financial Research Working Paper Series # 15-96
Posted: 7 Oct 1996
Date Written: September 1996
Firms are more complicated than standard principal-agent theory allows: firms have assets-in-place; firms endure through time, allowing for the possibility of replacing a shirking manager; firms have many managers, constraining the amount of equity that can be awarded to any one manager; and, a firm's owner can transfer some control to a manager, thereby entrenching her. Recognizing these characteristics, we solve for the vesting dates; wage, equity and options components; and control rights of an optimal contract. Managerial entrenchment makes the promise of deferred compensation credible. Deferring compensation by delaying vesting reduces a manager's ability to free-ride on a replacement's effort.
JEL Classification: D2, G3, J3
Suggested Citation: Suggested Citation