Indexing executive compensation contracts

I. Dittmann, E. Maug, O.G. Spalt

Research output: Contribution to journalArticleScientificpeer-review

15 Citations (Scopus)

Abstract

We analyze the efficiency of indexing executive pay by calibrating the standard compensation model to a large sample of U.S. CEOs. The benefits from indexing the strike price of options are small, and fully indexing all options would increase compensation costs by 50% for most firms. Indexing has several effects with overall ambiguous outcome; the quantitatively most important effect is to reduce incentives, because indexed options pay off when CEOs' marginal utility is low. The results also hold if CEOs can extract rents and extend to the case of indexing shares. Our findings may justify the common practice of “pay-for-luck.”
Original languageEnglish
Pages (from-to)3182-3224
JournalThe Review of Financial Studies
Volume26
Issue number12
DOIs
Publication statusPublished - 2013

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