The complexity of compensation contracts☆

https://doi.org/10.1016/S0304-405X(96)00888-4Get rights and content
Under a Creative Commons license
open archive

Abstract

Management compensation is often categorized as either sensitive or insensitive to firm performance. This one-dimensional treatment ignores the variation in the types and terms of compensation contracts. Through a cross-sectional examination of share-holder-authorized compensation arrangements, this paper demonstrates that the terms of stock option and restricted stock plans, and the flexibility afforded the board of directions in negotiating with managers, vary systematically with the characteristics of the assets being managed. This variation in compensation contracting challenges theorists to incorporate the richness of management contracts into models of incentive pay.

Keywords

Contracts
Executive compensation
Incentives

JEL classification

J33
L29

Cited by (0)

☆

This research is supported by the John M. Olin Foundation and the Bradley Policy Research Center, University of Rochester. Earlier drafts of this work were titled ‘The Bundling of Compensation Plans’.

∗

I am grateful for many helpful comments from the editors (Michael Jensen, G. William Schwert), the referee (George Baker), Jim Brickley, Scott Keating, Glenn MacDonald, Paul Milgrom, Kevin Murphy, Jeffrey Pontiff, Ed Rice, Clifford Smith, and Karen Wruck.

Copyright © 1997 Published by Elsevier B.V.