Dynamic managerial compensation: On the optimality of seniority-based schemes

Arbeitspapier

We study the optimal dynamics of incentives for a manager whose ability to generate cash .ows changes stochastically with time and is his private information. We show that, in general, the power of incentives (or "pay for performance") may either increase or decrease with tenure. However, risk aversion and high persistence of ability call for a reduction in the power of incentives later in the relationship. Our results follow from a new variational approach that permits us to tackle directly the "full program," thus bypassing some of the difficulties of working with the "relaxed program" encountered in the dynamic mechanism design literature.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Discussion Paper ; No. 1579

Classification and Topics

• Classification: Wirtschaft ; Asymmetric and Private Information; Mechanism Design
• Subject: managerial compensation ; power of incentives ; pay for performance ; dynamic mechanism design ; adverse selection ; moral hazard ; persistent productivity shocks ; risk aversion

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Garrett, Daniel ; Pavan, Alessandro
• Event: Veröffentlichung
• (who): Northwestern University, Kellogg School of Management, Center for Mathematical Studies in Economics and Management Science
• (where): Evanston, IL
• (when): 2014

Further information

• Handle: http://hdl.handle.net/10419/119415
• Last update: 13.03.2108, 11:30 AM CET