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|Title: ||Benefits of Broad-Based Option Pay|
|Authors: ||Inderst, Roman|
Mueller, Holger M.
|Issue Date: ||Nov-2004 |
|Series/Report no.: ||FIN-04-027|
|Abstract: ||Future wage payments drive a wedge between total firm output and the
output share received by the firm’s owners, thus potentially
distorting strategic decisions by the firm’s owners such as, e.g.,
whether to continue the firm, sell it, or shut it down. Using an optimal
contracting approach, we show that the unique optimal firm-wide employee
compensation scheme from this perspective is a broad-based option plan.
Broad-based option pay minimizes the firm’s expected future wage
payments in states of nature where the firm is only marginally
profitable, thus making continuation as attractive as possible in
precisely those states of nature where, e.g., a high fixed wage would
lead the firm’s owners to inefficiently exit.|
|Appears in Collections:||Finance Working Papers|
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