Executive Compensation : A Calibration Approach

Haubrich, Joseph G.; Popova, Ivilina

doi:10.26509/frbc-wp-199416

Cited by 7 publications

(8 citation statements)

References 18 publications

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“…Closely related to these studies are papers that combine CRRA preferences with geometric Brownian motions or a binomial approach in a dynamic model (see Huddart (1994), Carpenter (1998), Johnson and Tian (2000a,b), Ingersoll (2006)). The applications by Haubrich (1994), Haubrich and Popova (1998), and Margiotta and Miller (2000) use constant absolute risk aversion when calibrating a principal‐agent model.…”

mentioning

confidence: 99%

Sticks or Carrots? Optimal CEO Compensation when Managers Are Loss Averse

Dittmann¹,

Maug²,

Spalt³

2010

The Journal of Finance

168

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This paper analyzes optimal executive compensation contracts when managers are loss averse.We calibrate a stylized principal-agent model to the observed contracts of 595 CEOs and show that this model can explain observed option holdings and high base salaries remarkably well for a range of parameterizations. We also derive and calibrate the general shape of the optimal contract that is increasing and convex for medium and high outcomes and drops discontinuously to the lowest possible payout for low outcomes. We identify the critical features of the loss-aversion model that render optimal contracts convex.

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mentioning

confidence: 99%

Sticks or Carrots? Optimal CEO Compensation when Managers Are Loss Averse

Dittmann¹,

Maug²,

Spalt³

2010

The Journal of Finance

168

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“…Hemmer et al (2000) use HARA utility and a Gamma distribution in an analytic model. Haubrich and Popova (1998) is one of the few studies that uses CARA preferences in a calibration exercise. They also use a discrete state space model.…”

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confidence: 99%

“…9 9 See also Garen (1994), Haubrich (1994), Haubrich and Popova (1998), and Margiotta and Miller (2000) for different econometric approaches. None of these studies allows for stock options.…”

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confidence: 99%

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

Dittmann¹,

Maug

2007

The Journal of Finance

292

149

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We calibrate the standard principal-agent model with constant relative risk aversion and lognormal stock prices to a sample of 598 U.S. CEOs. We show that this model predicts that most CEOs should not hold any stock options. Instead, CEOs should have lower base salaries and receive additional shares in their companies; many would be required to purchase additional stock in their companies. These contracts would reduce average compensation costs by 20% while providing the same incentives and the same utility to CEOs. We conclude that the standard principal-agent model typically used in the literature cannot rationalize observed contracts. Copyright 2007 by The American Finance Association.

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“…An alternative procedure, as well as the characterization of the optimal incentive scheme was provided by Grossman and Hart (1983). Extending the Grossman-Hart model to 10 actions and 10 states, the empirical application of their model was carried out by Haubrich and Popova (1998).…”

Section: Literature Reviewmentioning

confidence: 99%

An Optimal Incentive Contract Preventing Excessive Risk-Taking by a Bank Manager

Henry

2012

SSRN Journal

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The Basel Committee of Banking Supervision initiated a discussion on the most efficient practices to prevent bank managers from excessive risk-taking. This paper proposes a game-theoretical approach, describing the decision-making process by a bank manager who chooses his own level of risk and effort. If the level of risk implies the variability of the future outcome, the amount of effort applied affects the probability of a positive outcome. Although effort is unobserved for the bank's stakeholders, the risk level is under control, and is associated with certain indicators such as capital adequacy ratio or leverage level.The risk-neutral utility function of a bank manager and a binary game outcome of gaining profit or loss for a bank are assumed. Starting from the general incentive contract scheme having the fixed and variable parts of remuneration, it is proposed, that differentiating the variable part of remuneration is sufficient to motivate bank managers to make fewer risky decisions. More precisely, the variable part of remuneration (e.g. the share of the bank's profit) needs to be higher in proportion to the higher variance of outcome for the high -risk outcome case to stimulate a bank manager to opt for lower-risk decisions in place of higher-risk situations.

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Executive Compensation : A Calibration Approach

Cited by 7 publications

References 18 publications

Sticks or Carrots? Optimal CEO Compensation when Managers Are Loss Averse

Sticks or Carrots? Optimal CEO Compensation when Managers Are Loss Averse

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

An Optimal Incentive Contract Preventing Excessive Risk-Taking by a Bank Manager

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