Only time will tell: A theory of deferred compensation

Arbeitspapier

This paper provides a complete characterization of optimal contracts in principal-agent settings where the agent's action has persistent effects. We model general information environments via the stochastic process of the likelihood-ratio. The martingale property of this performance metric captures the information benefit of deferral. Costs of deferral may result from both the agent's relative impatience as well as her consumption smoothing needs. If the relatively impatient agent is risk neutral, optimal contracts take a simple form in that they only reward maximal performance for at most two payout dates. If the agent is additionally risk-averse, optimal contracts stipulate rewards for a larger selection of dates and performance states: The performance hurdle to obtain the same level of compensation is increasing over time whereas the pay-performance sensitivity is declining.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: SAFE Working Paper ; No. 218

Classification and Topics

• Classification: Wirtschaft ; Economics of Contract: Theory
• Subject: compensation design ; duration of pay ; moral hazard ; persistence ; principal-agent models ; informativeness principle

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Hoffmann, Florian ; Inderst, Roman ; Opp, Marcus M.
• Event: Veröffentlichung
• (who): Goethe University Frankfurt, SAFE - Sustainable Architecture for Finance in Europe
• (where): Frankfurt a. M.
• (when): 2018

Further information

• DOI: doi:10.2139/ssrn.3232708
• Handle: http://hdl.handle.net/10419/181654
• URN: urn:nbn:de:hebis:30:3-472016
• Last update: 10.03.2025, 11:43 AM CET