Indexing Executive Compensation Contracts

Indexing Executive Compensation Contracts

Ingolf Dittmann, Ernst Maug, Oliver Spalt

Series number :

Serial Number: 
309/2011

Date posted :

June 01 2011

Last revised :

February 25 2021
SSRN Share

Keywords

  • executive compensation • 
  • indexed options • 
  • relative performance evaluation • 
  • pay for luck

We analyze the efficiency of indexing executive pay by calibrating the standard model of executive compensation to a large sample of US CEOs. The benefits from linking the strike price of stock options to an index are small and fully indexing all options would increase compensation costs by about 50% for most firms.

Indexing has several effects with overall ambiguous impact; the quantitatively most important effect is to reduce incentives, because indexed options pay off when CEOs’ marginal utility is low. The results also hold if CEOs can extract rents and extend to the case of indexing shares.

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Published in

Published in: 
Publication Title: 
Review of Financial Studies, Vol. 26, 3182-3224, 2013

Authors