FIN-04-027 |
NYU Stern School of Business |
December 2004
Roman Inderst and Holger Mueller
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.
Roman Inderst
Institution: London School of Economics
Email: roman.inderst@insead.edu
Holger H. Mueller
Institution: Stern School of Business, New York University, 44th West 4th Street, New York, NY 10012
Telephone: (212) 998-0279
Fax: (212) 995-4233
Email: hmueller@stern.nyu.edu
Homepage:http://www.stern.nyu.edu/~hmueller
To download a copy of this paper click here
To request a copy of this paper click here
|