IDEAS home Printed from https://ideas.repec.org/a/oup/rfinst/v26y2013i12p3182-3224.html
   My bibliography  Save this article

Indexing Executive Compensation Contracts

Author

Listed:
  • Ingolf Dittmann
  • Ernst Maug
  • Oliver G. Spalt

Abstract

We analyze the efficiency of indexing executive pay by calibrating the standard compensation model to a large sample of U.S. CEOs. The benefits from indexing the strike price of options are small, and fully indexing all options would increase compensation costs by 50% for most firms. Indexing has several effects with overall ambiguous outcome; the quantitatively most important effect is to reduce incentives, because indexed options pay off when CEOs' marginal utility is low. The results also hold if CEOs can extract rents and extend to the case of indexing shares. Our findings may justify the common practice of "pay-for-luck." The Author 2013. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: journals.permissions@oup.com., Oxford University Press.

Suggested Citation

  • Ingolf Dittmann & Ernst Maug & Oliver G. Spalt, 2013. "Indexing Executive Compensation Contracts," The Review of Financial Studies, Society for Financial Studies, vol. 26(12), pages 3182-3224.
    • Handle: RePEc:oup:rfinst:v:26:y:2013:i:12:p:3182-3224
    as

    Download full text from publisher

    File URL: http://hdl.handle.net/10.1093/rfs/hht052
    Download Restriction: Access to full text is restricted to subscribers.
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Cole, John A. & Cadogan, Godfrey, 2014. "Bankruptcy risk induced by career concerns of regulators," Finance Research Letters, Elsevier, vol. 11(3), pages 259-271.
    2. Edmans, Alex & Gottlieb, Daniel & Chaigneau, Pierre, 2014. "The Value of Informativeness for Contracting," CEPR Discussion Papers 10180, C.E.P.R. Discussion Papers.
    3. Chaigneau, Pierre & Edmans, Alex & Gottlieb, Daniel, 2018. "Does improved information improve incentives?," Journal of Financial Economics, Elsevier, vol. 130(2), pages 291-307.
    4. Miguel Antón & Florian Ederer & Mireia Giné & Martin Schmalz, 2023. "Common Ownership, Competition, and Top Management Incentives," Journal of Political Economy, University of Chicago Press, vol. 131(5), pages 1294-1355.
    5. Merz, Alexander, 2017. "What have we learned from SFAS 123r and IFRS 2? A review of existing evidence and future research suggestions," Journal of Accounting Literature, Elsevier, vol. 38(C), pages 14-33.
    6. Edmans, Alex & Gosling, Tom & Jenter, Dirk, 2023. "CEO compensation: Evidence from the field," Journal of Financial Economics, Elsevier, vol. 150(3).
    7. Wang, Xingchun, 2019. "Valuation of new-designed contracts for catastrophe risk management," The North American Journal of Economics and Finance, Elsevier, vol. 50(C).
    8. Wang, Guanying & Wang, Xingchun & Shao, Xinjian, 2022. "Exchange options for catastrophe risk management," The North American Journal of Economics and Finance, Elsevier, vol. 59(C).
    9. Qi Liu & Bo Sun, 2016. "Relative Wealth Concerns, Executive Compensation, and Systemic Risk-Taking," International Finance Discussion Papers 1164, Board of Governors of the Federal Reserve System (U.S.).
    10. Wang, Xingchun, 2021. "The values and incentive effects of options on the maximum or the minimum of the stock prices and market index," The North American Journal of Economics and Finance, Elsevier, vol. 55(C).
    11. repec:oup:rfinst:v:21:y:2017:i:5:p:1805-1846. is not listed on IDEAS
    12. Geys, Benny & Heggedal, Tom-Reiel & Sørensen, Rune J., 2017. "Are bureaucrats paid like CEOs? Performance compensation and turnover of top civil servants," Journal of Public Economics, Elsevier, vol. 152(C), pages 47-54.
    13. Zhiwei Su & Xingchun Wang, 2019. "Pricing executive stock options with averaging features under the Heston–Nandi GARCH model," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 39(9), pages 1056-1084, September.
    14. Carlos Miguel Glória & José Carlos Dias & João Pedro Ruas & João Pedro Vidal Nunes, 2024. "The interaction between equity-based compensation and debt in managerial risk choices," Review of Derivatives Research, Springer, vol. 27(3), pages 227-258, October.
    15. Ingolf Dittmann & Ko-Chia Yu & Dan Zhang, 2017. "How Important Are Risk-Taking Incentives in Executive Compensation?," Review of Finance, European Finance Association, vol. 21(5), pages 1805-1846.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:oup:rfinst:v:26:y:2013:i:12:p:3182-3224. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Oxford University Press (email available below). General contact details of provider: https://edirc.repec.org/data/sfsssea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.