Data Management

Dynamic Incentive Accounts

Date Added: May 2010
Format: PDF

The authors study optimal executive compensation in a dynamic framework that incorporates many important features of the CEO Job absent from a static setting. Shocks to firm value may weaken the incentive effects of securities over time. The CEO can undo the contract by privately saving, and temporarily manipulate the stock price. Despite the complex setup, they obtain a simple closed-form contract. It can be implemented by a "Dynamic Incentive Account": the CEO's expected pay is escrowed into an account, a fraction of which is invested in the firm's stock and the remainder in cash.