Abstract
We derive an optimal compensation scheme that aims to eliminate inadequate misaligned managerial actions ensuring optimal investment decisions. With this model, the owners of the option to invest do not need to follow the future evolution of project value drivers in order to guarantee optimal behavior. The optimal contract scheme is a correct balance between effort costs, fixed wages, and a value-sharing bonus. As shown, even small deviations from the optimal compensation scheme may lead to highly sub-optimal decisions. The model is extended to accommodate impatience behavior by the managers or the shareholders.
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have