Sticks or carrots? Optimal CEO compensation when managers are loss-averse

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

Research output: Contribution to journalArticleScientificpeer-review

77 Citations (Scopus)


This paper analyzes optimal executive compensation contracts when managers are loss averse. We calibrate a stylized principal-agent model to the observed contracts of 595 CEOs and show that this model can explain observed option holdings and high base salaries remarkably well for a range of parameterizations. We also derive and calibrate the general shape of the optimal contract that is increasing and convex for medium and high outcomes and that drops discontinuously to the lowest possible payout for low outcomes. Finally, we identify the critical features of the loss-aversion model that render optimal contracts convex.
Original languageEnglish
Pages (from-to)2015-2050
JournalJournal of Finance
Issue number6
Publication statusPublished - 2010


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