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Optimal Executive Compensation: Bonus, Golden Parachutes, Stock Ownership and Stock Options

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  • Chongwoo Choe

Abstract

This paper studies optimal managerial contracts applying both complete and incomplete contracting approaches. In a complete contracting environment where contracts can be based on earnings, an optimal contract is interpreted as a combination of base salary, golden parachute and bonus. When earnings are not veri able, two types of optimal contracts are derived: a contract with restricted stock ownership, and a contract with stock options. These three types of optimal contracts are payoff-equivalent in a strong sense: agents' ex ante and ex post payoffs are the same under all three contracts. This suggests that the choice of contractual form is irrelevant in the environment studied in this paper. Comparative static analyses of optimal contracts generate several testable hypotheses.

Suggested Citation

  • Chongwoo Choe, 1999. "Optimal Executive Compensation: Bonus, Golden Parachutes, Stock Ownership and Stock Options," Working Papers w199903, Banco de Portugal, Economics and Research Department.
    • Handle: RePEc:ptu:wpaper:w199903
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    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods

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