TY  - JOUR
AU  - Edmans,Alex
AU  - Gabaix,Xavier
AU  - Sadzik,Tomasz
AU  - Sannikov,Yuliy
TI  - Dynamic Incentive Accounts
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 15324
PY  - 2009
Y2  - September 2009
DO  - 10.3386/w15324
UR  - http://www.nber.org/papers/w15324
L1  - http://www.nber.org/papers/w15324.pdf
N1  - Author contact info:
Alex Edmans
London Business School
Regent's Park
London NW1 4SA
UK
Tel: (020) 7000 8258
E-Mail: aedmans@london.edu

Xavier Gabaix
Department of Economics
Harvard University
Littauer Center
1805 Cambridge St

Cambridge, MA 02138
E-Mail: xgabaix@fas.harvard.edu

Tomasz Sadzik
Department of Economics
8283 Bunche Hall
Los Angeles, CA 90405
USA
Tel: 6466331967
E-Mail: tsadzik@econ.ucla.edu

Yuliy Sannikov
Stanford GSB
Stanford University
Palo Alto, CA
E-Mail: sannikov@gmail.com
AB  - Contracts in a dynamic model must address a number of issues absent from static frameworks. Shocks to firm value may weaken the incentive effects of securities (e.g. cause options to fall out of the money), and the impact of some CEO actions may not be felt until far in the future. We derive the optimal contract in a setting where the CEO can affect firm value through both productive effort and costly manipulation, and may undo the contract by privately saving. The optimal contract takes a surprisingly simple form, and can be implemented by a "Dynamic Incentive Account." The CEO's expected pay is escrowed into an account, a fraction of which is invested in the firm's stock and the remainder in cash. The account features state-dependent rebalancing and time-dependent vesting. It is constantly rebalanced so that the equity fraction remains above a certain threshold; this threshold sensitivity is typically increasing over time even in the absence of career concerns. The account vests gradually both during the CEO's employment and after he quits, to deter short-termist actions before retirement.
ER  -