Lower Salaries and No Options? On the Optimal Structure of Executive Pay




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    • Ingolf Dittmann is at Erasmus University Rotterdam. Ernst Maug is at the University of Mannheim. We are grateful to Axel Adam-Müller, Nemmara Chidambaran, Wayne Guay, Michel Habib, Dirk Jenter, Christian Laux, Kai Li, Bob Miller, Kristian Rydqvist, Stefan Winter, David Yermack, and seminar participants at the Accounting Research Workshop (Bern), the Haifa-Humboldt Workshop (Haifa), the Ottobeuren meetings, Erasmus University Rotterdam, Hong Kong University of Science and Technology, London School of Economics, McIntire School of Business (University of Virginia), Université Paris Dauphine, University of Frankfurt/Main, University of Konstanz, University of Mannheim, and University of Zurich for clarifying discussions and suggestions on an earlier draft of this paper. In addition, the paper greatly benefited from the comments of an anonymous referee. We also thank Oliver Spalt for excellent research assistance. We gratefully acknowledge financial support from the Rudolf von Bennigsen-Foerder Foundation and from the Deutsche Forschungsgemeinschaft through the SFB 649 “Economic Risk.”


We calibrate the standard principal–agent model with constant relative risk aversion and lognormal stock prices to a sample of 598 U.S. CEOs. We show that this model predicts that most CEOs should not hold any stock options. Instead, CEOs should have lower base salaries and receive additional shares in their companies; many would be required to purchase additional stock in their companies. These contracts would reduce average compensation costs by 20% while providing the same incentives and the same utility to CEOs. We conclude that the standard principal–agent model typically used in the literature cannot rationalize observed contracts.