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MANAGERS’ COMPENSATION AND MISREPORTING: A COSTLY STATE VERIFICATION APPROACH
Author(s) -
BAGLIONI ANGELO,
COLOMBO LUCA
Publication year - 2009
Publication title -
economic inquiry
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.823
H-Index - 72
eISSN - 1465-7295
pISSN - 0095-2583
DOI - 10.1111/j.1465-7295.2007.00114.x
Subject(s) - non qualified stock option , stock options , restricted stock , audit , incentive compatibility , microeconomics , economics , shareholder , stock (firearms) , incentive , business , finance , accounting , engineering , stock market , mechanical engineering , paleontology , corporate governance , horse , biology
We look for the optimal shareholder‐manager contract leading to high effort and truthful revelation of firm performance. This twofold incentive compatibility constraint calls for a convex compensation scheme (a fixed wage plus a stock option) coupled with a state contingent audit. In order to reduce expected verification costs, an optimal stock option plan assigns the manager a large number of options with high strike price. It is suggested that focusing the audit activity (and supervision) on the exercise of stock option packages is a better solution to the problem of misreporting than giving up stock options as a compensation tool. ( JEL D82, G30, M40, M52)