TY  - JOUR
AU  - Gorton,Gary
AU  - Grundy,Bruce D.
TI  - Executive Compensation and the Optimality of Managerial Entrenchment
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 5779
PY  - 1996
Y2  - September 1996
UR  - http://www.nber.org/papers/w5779
L1  - http://www.nber.org/papers/w5779.pdf
N1  - Author contact info:
Gary B. Gorton
Yale School of Management
135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
Fax: 203/432-8931
E-Mail: Gary.Gorton@yale.edu

Bruce Grundy
Finance Department, Wharton School
University of Pennsylvania
3620 Locust Walk
Philadelphia, PA  19104-6367
Tel: 215/898-3004
AB  - Firms are more complicated than standard principal-agent theory allows: firms have assets-in-place; firms endure through time, allowing for the possibility of replacing a shirking manager; firms have many managers, constraining the amount of equity that can be awarded to any one manager; and, a firm's owner can transfer some control to a manager, thereby entrenching her. Recognizing these characteristics, we solve for the vesting dates; wage, equity and options components; and control rights of an optimal contract.  Managerial entrenchment makes the promise of deferred compensation credible.  Deferring compensation by delaying vesting reduces a manager's ability to free-ride on a replacement's effort.
ER  -