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Dynamic incentives and retirement

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  • Sabac, Florin

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.

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  • Sabac, Florin, 2008. "Dynamic incentives and retirement," Journal of Accounting and Economics, Elsevier, vol. 46(1), pages 172-200, September.
    • Handle: RePEc:eee:jaecon:v:46:y:2008:i:1:p:172-200
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