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Please use this identifier to cite or link to this item: http://hdl.handle.net/2451/26804

Title: Benefits of Broad-Based Option Pay
Authors: Inderst, Roman
Müller, Holger M.
Issue Date: Nov-2004
Series/Report no.: S-DRP-04-04
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.
URI: http://hdl.handle.net/2451/26804
Appears in Collections:Derivatives Research

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