Working Paper: NBER ID: w9887
Authors: Brian J. Hall
Abstract: This paper analyzes why the primary goal of the equity-pay explosion--creating long-run ownership incentives for top executives--has often been difficult to achieve in practice. More generally, I describe six challenges in the design of equity-based pay plans and discuss potential solutions. The six challenges involve: 1. mismatched time horizons; 2. gaming; 3. the value-cost wedge'; 4. the leverage-fragility tradeoff; 5. aligning risk-taking incentives; and 6. avoiding excessive compensation. The paper also discussed the merits of stock versus options and concludes that restricted stock is often a superior form of compensation.
Keywords: No keywords provided
JEL Codes: J0; J3; L0; L2
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| equity compensation (M52) | corporate productivity (O49) |
| equity compensation (M52) | corporate value (G30) |
| poorly designed equity pay (J33) | short-termism (G31) |
| poorly designed equity pay (J33) | unethical behavior (K42) |
| equity pay design (J33) | executive behavior (L20) |
| longer vesting periods (G23) | reduce short-term manipulation (E71) |
| high-powered equity pay (J33) | unethical behavior (K42) |