A Comparison of Options, Restricted Stock, and Cash for Employee Compensation

Oyer, Paul; Schaefer, Scott

doi:10.2139/ssrn.441860

Cited by 14 publications

(14 citation statements)

References 29 publications

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“…The alternative hypothesis is that a higher percentage of equity compensation is used by firms for retention reasons, rather than to resolve potential agency issues through incentive alignment (Oyer & Schaefer, 2003. For example, when an executive leaves for another company, this decision will be partially influenced by the costs of leaving a current employer.…”

Section: Retention and Career Concernsmentioning

confidence: 99%

CEO compensation structure following succession: Evidence of optimal incentives with career concerns

Elsaid

Davidson

Benson

2009

The Quarterly Review of Economics and Finance

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JEL classification: G14 G34 J33 M52Keywords: CEO succession CEO compensation Managerial incentives Managerial labor market a b s t r a c tTo motivate managers to pursue shareholder interests, boards may design management compensation packages to reward managers for good firm performance. However, Gibbons and Murphy (1992) note that when CEOs are far from retirement, they have career concerns. In these cases, Gibbons and Murphy argue that it may not be optimal for their current compensation to be too dependent on firm performance. Testing this proposition, we find that abnormal returns are negatively related to the percentage of performancebased pay of newly hired CEOs when companies announce CEO successions. Since these newly hired CEOs are likely some distance from retirement, we interpret these results as being consistent with Gibbons and Murphy; it may be better to allow newly hired CEOs to be paid in human capital increases from the managerial labor market than to have their current pay too closely related to performance.

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Section: Retention and Career Concernsmentioning

confidence: 99%

CEO compensation structure following succession: Evidence of optimal incentives with career concerns

Elsaid

Davidson

Benson

2009

The Quarterly Review of Economics and Finance

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“…Compensation aligned with unequivocal measures of corporate success is believed to reduce agency costs such as the excessive consumption of prerequisites by higher-level managers. While agency theory may clearly dictate that executive compensation is an important lever for control of agent behavior, considerable disputes exist in the literature regarding an optimal structure for the components of total compensation (e.g., Hall and Knox, 2004;Hall and Murphy, 2003;Matsumara et al, 2005;Oyer and Schaefer, 2003;Perel, 2003;Yermack, 2003). Early studies suggest that pay to performance sensitivity tends to be excessively low (e.g., Garen, 1994;Jensen and Murphy, 1990), therefore failing to curb agency costs.…”

Section: Executive Compensationmentioning

confidence: 99%

Inside Agency: The Rise and Fall of Nortel

et al. 2008

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“…3 Hence, we feel entitled to argue that our modeling approach implements a variant of the "conventional" model. 2 CRRA preferences and lognormal prices have been used by Lambert, Larcker, and Verrecchia (1991), Hall and Murphy (2000), (2002), Himmelberg and Hubbard (2000), Hall and Knox (2004), Jenter (2002) and Oyer and Schaefer (2003). Closely related are models that combine CRRA-preferences with geometric binomial trees or geometric Brownian motion models of stock price development that generate identical or similar distributions of stock prices.…”

Section: Marketmentioning

confidence: 99%

Lower Salaries and No Options? On the Optimal Structure of Executive Pay

2003

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We estimate a standard principal agent model with constant relative risk aversion and lognormal stock prices for a sample of 598 US CEOs. The model is widely used in the compensation literature, but it predicts that almost all of the CEOs in our sample should hold no stock options. Instead, CEOs should have lower base salaries and receive additional shares in their companies. For a typical value of relative risk aversion, almost half of the CEOs in our sample would be required to purchase additional stock in their companies from their private savings. The model predicts contracts that would reduce average compensation costs by 20% while providing the same incentives and the same utility to CEOs. We investigate a number of extensions and modi…cations of the standard model, but …nd none of them to be satisfactory. We conclude that the standard principal agent model typically used in the literature cannot rationalize observed contracts. One reason may be that executive pay contracts are suboptimal.JEL Classi…cation: G30, M52

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A Comparison of Options, Restricted Stock, and Cash for Employee Compensation

Cited by 14 publications

References 29 publications

CEO compensation structure following succession: Evidence of optimal incentives with career concerns

CEO compensation structure following succession: Evidence of optimal incentives with career concerns

Inside Agency: The Rise and Fall of Nortel

Lower Salaries and No Options? On the Optimal Structure of Executive Pay

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