Executive Compensation and the Optimality of Managerial Entrenchment / Gary Gorton, Bruce D. Grundy.

Format:

Book

Author/Creator:

Gorton, Gary.

Contributor:

National Bureau of Economic Research.

Grundy, Bruce D.

Series:

Working Paper Series (National Bureau of Economic Research) no. w5779.

NBER working paper series no. w5779

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 1996.

Summary:

Firms are more complicated than standard principal-agent theory allows: firms have assets-in-place; firms endure through time, allowing for the possibility of replacing a shirking manager; firms have many managers, constraining the amount of equity that can be awarded to any one manager; and, a firm's owner can transfer some control to a manager, thereby entrenching her. Recognizing these characteristics, we solve for the vesting dates; wage, equity and options components; and control rights of an optimal contract. Managerial entrenchment makes the promise of deferred compensation credible. Deferring compensation by delaying vesting reduces a manager's ability to free-ride on a replacement's effort.

Notes:

Print version record

September 1996.