7th International Conference on Machine Learning and Cybernetics, 2008-07-12 to 2008-07-15.
The research on the optimal design of securities grants is still in its infancy. In this paper, a simple dynamic model of the relationship between a firm and its chief executive officer Is established. The optimal long-term compensation with limited commitment is analyzed under complete information. The main result is that, in the environment of symmetric information, manager's continuation utility is equal to his reservation utility. If stock grants are not used as deferred compensation, the optimal contract collapses to a series of short term contracts. When stock grants are used, however, inclusion of stock grants in the compensation package could not be implemented to achieve higher firm value.
executive stock grants; moral hazard; optimal contract; symmetric information