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| Author: | Meza, D. de Webb, D.C. |
| Title: | Incentive design under loss aversion |
| Journal: | Journal of the European Economic Association
2007 : MAR, VOL. 5:1, p. 66-92 |
| Index terms: | executive remuneration compensation stock options bonus systems pay models |
| Language: | eng |
| Abstract: | Compensation schemes, e.g. fixed salaries with stock options or bonuses often reward success but do not penalize failure. The standard principal-agent model implies, however, that pay is normally monotonically increasing in performance. This paper shows that, under loss aversion, there will be intervals over which pay is insensitive to performance... A further benefit of capping losses, e. g. via options, is to discourage reckless executive behaviour aiming at resurrecting fortunes. |
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