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

By:

Gorton, Gary

Contributor(s):

Material type: Text

TextSeries: Working Paper Series (National Bureau of Economic Research) ; no. w5779.Publication details: Cambridge, Mass. National Bureau of Economic Research 1996.Description: 1 online resource: illustrations (black and white)Subject(s):

G3 - Corporate Finance and Governance

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Available additional physical forms:

Hardcopy version available to institutional subscribers

Abstract: 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.

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Item type	Home library	Collection	Call number	Status	Date due	Barcode	Item holds
Working Paper	Biblioteca Digital	Colección NBER	nber w5779 (Browse shelf(Opens below))	Not For Loan

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Previous	nber w5776 Simulating the Privatization of Social Security in General Equilibrium /	nber w5777 The Long-Run U.S./U.K. Real Exchange Rate /	nber w5778 Children and Their Parents' Labor Supply: Evidence from Exogenous Variation in Family Size /	nber w5779 Executive Compensation and the Optimality of Managerial Entrenchment /	nber w5780 Pension System Reform: The Mexican Case /	nber w5781 Child Support and Fathers' Remarriage and Fertility /	nber w5782 A Critical Assessment of the Role of Imperfect Competition in Macroeconomics /	Next

September 1996.

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.