Optimal Executive Compensation: Some Equivalence Results

This paper studies optimal managerial contracts in two contracting environments. When contracts can be based on earnings, an optimal contract is interpreted as a combination of base salary, golden parachute and bonus. When earnings are not verifiable, two types of optimal contracts are derived: a contract with restricted stock ownership, and a contract with stock options. These three types of optimal contracts are payoff-equivalent in a strong sense: agents' ex ante and ex post payoffs are the same under all three contracts, implying that the choice of contractual form is irrelevant in the environment studied in this paper. This paper thus suggests directions of research for the relevance of different contractual forms.