Earnings-based compensation contracts under asymmetric information

Miglo, Anton (2009) Earnings-based compensation contracts under asymmetric information. Manchester School, 77 (2). pp. 225-243. ISSN 1463-6786

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Abstract

We analyze a model with two-dimensional asymmetric information in which the employer has better information about the fi�rm�'s earnings potential and the employee is subject to moral hazard. The employee'�s contract consists of an annual bonus and stock options. We focus on two issues: how di¤erent degrees of asymmetric information
about short-term earnings versus long-term earnings a¤ect optimal contracts and second, if a signalling equilibrium exists, what information concerning the �rm�s performance pro�le over time can be conveyed by the choice of contract. We show that if the extent of long-term (short-term) asymmetric information is larger, short-term (long-term) compensation prevails. With regard to signalling, we show
that �rms o¤ering more options have higher short-term performance and lower long-term performance. This provides new insights into the structure of earnings-based compensation.

Item Type:	Article
Dates:	Date Event 20 September 2008 Accepted 2009 Published
Subjects:	CAH15 - social sciences > CAH15-02 - economics > CAH15-02-01 - economics CAH17 - business and management > CAH17-01 - business and management > CAH17-01-02 - business studies CAH17 - business and management > CAH17-01 - business and management > CAH17-01-04 - management studies CAH17 - business and management > CAH17-01 - business and management > CAH17-01-07 - finance
Divisions:	Faculty of Business, Law and Social Sciences > College of Accountancy, Finance and Economics Faculty of Business, Law and Social Sciences > College of Business, Digital Transformation & Entrepreneurship
Depositing User:	Anton Miglo
Date Deposited:	15 Aug 2018 08:58
Last Modified:	20 Jun 2024 12:07
URI:	https://www.open-access.bcu.ac.uk/id/eprint/6239