Stock Grants as a Committment Device

27 Pages Posted: 31 Oct 2008

See all articles by Gian Luca Clementi

Gian Luca Clementi

New York University - Leonard N. Stern School of Business; National Bureau of Economic Research (NBER); University of Bologna - Rimini Center for Economic Analysis (RCEA)

Thomas F. Cooley

New York University - Leonard N. Stern School of Business; National Bureau of Economic Research (NBER)

Date Written: March 2003

Abstract

A large and increasing fraction of the value of executives compensation is accountedfor by security grants. It is often argued that the optimal compensation contracts characterized in the theoretical literature can be implemented by means of stock or option grants. However, in most cases the optimal allocation can be implemented simply by a contingent sequence of cash payments. Security awards are redundant. In this paper we develop a dynamic model of managerial compensation where neither the firm nor the manager can commit to long-term contracts.We show that, in this environment, if stock grants are not used, then the optimal contract collapses to a series of short term contracts. When stock grants are used, however, nonlinear intertemporal schemes can be implemented to achieve better risk-sharing and greater firm value.

Keywords: Moral Hazard, Optimal Contracts, CEO Compensation, Stock Grants

Suggested Citation

Clementi, Gian Luca and Cooley, Thomas F., Stock Grants as a Committment Device (March 2003). NYU Working Paper No. EC-04-24, Available at SSRN: https://ssrn.com/abstract=1292192

Gian Luca Clementi (Contact Author)

New York University - Leonard N. Stern School of Business ( email )

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Thomas F. Cooley

New York University - Leonard N. Stern School of Business ( email )

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