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The effect of risk preferences on the valuation and incentives of compensation contracts

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  • Pierre Chaigneau

Abstract

We use a comparative approach to study the incentives provided by di erent types of compensation contracts, and their valuation by risk averse managers, in a fairly general setting. We show that concave contracts tend to provide more incentives to risk averse managers, while convex contracts tend to be more valued by prudent managers. Thus, prudence can contribute to explain the prevalence of stock-options in executive compen- sation. We also present a condition on the utility function which enables to compare the structure of optimal contracts associated with di erent risk preferences.

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  • Pierre Chaigneau, 2012. "The effect of risk preferences on the valuation and incentives of compensation contracts," FMG Discussion Papers dp697, Financial Markets Group.
    • Handle: RePEc:fmg:fmgdps:dp697
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    References listed on IDEAS

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    1. Jenter, Dirk, 2004. "Executive Compensation, Incentives, and Risk," Working papers 4466-02, Massachusetts Institute of Technology (MIT), Sloan School of Management.
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    6. Chaigneau, Pierre, 2013. "Explaining the structure of CEO incentive pay with decreasing relative risk aversion," Journal of Economics and Business, Elsevier, vol. 67(C), pages 4-23.
    7. Ingolf Dittmann & Ernst Maug & Oliver Spalt, 2010. "Sticks or Carrots? Optimal CEO Compensation when Managers Are Loss Averse," Journal of Finance, American Finance Association, vol. 65(6), pages 2015-2050, December.
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    Full references (including those not matched with items on IDEAS)

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