Compensation

Owner/Manager Incentives vs. Employee/Manager Incentives

Consider the following benchmark portfolio for an employee/manager:

• Salary $500,000
• can be dismissed only if firm goes bankrupt
• annual raises to cover COLA + 2%

How might we characterize the above claim (i.e., residual or fixed?) Implications?

We want to think about the incentives of an employee/manager given such a contract versus the incentives of owner/managers.

Problems of benchmark compensation contract:

• Effort
• Risk exposure
• Horizon problem
• Under-leverage
• Over-retention

These areas of conflict between owners' incentives and managers' incentives will be more or less of a problem depending on the nature of the firm. To that extent, we expect to see systematic variation in contract provisions across firms depending on their nature.