A Compensation Scheme for Optimal Investment Decisions

• Type: Article in International Scientific Journal
• Date: 2015

Authors

David Cardoso (Author) FEP; Paulo Jorge Pereira (Author) FEP

Journal

Title: Finance Research Letters

Vol. 14

Pages: 150-159

ISSN: 1544-6123

Publisher: Elsevier

Indexing

ISI Web of Knowledge - 6 Citations

ISI Web of Science

Scopus - 6 Citations

Scientific classification

FOS: Social sciences > Economics and Business

CORDIS: Social sciences > Economics > Management studies

Other information

Authenticus ID: P-00G-G2D

DOI: 10.1016/j.frl.2015.05.004

Abstract (EN): We derive an optimal compensation scheme that aims to eliminate inadequate misaligned managerial actions ensuring optimal investment decisions. With this model, the owners of the option to invest do not need to follow the future evolution of project value drivers in order to guarantee optimal behavior. The optimal contract scheme is a correct balance between effort costs, fixed wages, and a value-sharing bonus. As shown, even small deviations from the optimal compensation scheme may lead to highly sub-optimal decisions. The model is extended to accommodate impatience behavior by the managers or the shareholders.

Language: English

Type (Professor's evaluation): Scientific