Home About Latest Browse RSS Advanced Search

Board of Governors of the Federal Reserve System (U.S.)
International Finance Discussion Papers
Risk Choices and Compensation Design
Mark S. Carey
Bo Sun
Abstract

We analyze the impact of bad-tail risks on managerial pay functions, especially the decision to pay managers in stock or in options. In contrast to conventional wisdom, we find that options are often a superior vehicle for limiting managerial incentives to take bad-tail risks while providing incentives to exert effort. Arrangements similar to collar options are able to incent the desired project choice in wider range of circumstances than call options or stock. However, information requirements appear high. We briefly explore alternatives with features similar to maluses and clawbacks, which are a bit like weakening the limited liability of managers.


Download Full text
Download http://dx.doi.org/10.17016/IFDP.2015.1130
Cite this item
Mark S. Carey & Bo Sun, Risk Choices and Compensation Design, Board of Governors of the Federal Reserve System (U.S.), International Finance Discussion Papers 1130, 26 Jan 2015.
More from this series
JEL Classification:
Subject headings:
Keywords: Compensation; Bad tail risk
For corrections, contact Ryan Wolfslayer ()
Fed-in-Print is the central catalog of publications within the Federal Reserve System. It is managed and hosted by the Economic Research Division, Federal Reserve Bank of St. Louis.

Privacy Legal