Tirole20-29 - Tirole, J. 2006. Theory of Corporate Finance....

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Tirole, J. 2006. Theory of Corporate Finance. Chapter 1, Corporate Governance, pp. 20- 29 1.1 A sophisticated Mix of Incentives - explicit and implicit incentives partly align managerial incentives with the firm’s interest - monitoring and product-market competition further keep tight rein on managerial behavior - also intrinsic motivation serves as incentive 1.2 Monetary Incentives The compensation package Three ways to receive compensation: Salary, Bonus, Stock-based incenctives Bonuses and sharholdings: substitutes or complements? Bonuses: defined by current profit accounting data, strong incentive to privilege short-term Stock options: based on value of shares market data, strong incentive to privilege long-term Therefore serve two different and complementary purposes! The compensation base Compensation should not be based on factors outside the control of manager e.g. managerial compensation should be immunized against shocks suchs as fluctuations in exchange rates, interest rates etc. relative performance evaluation; mgmt is rewarded as a function of relative performance in peer group rather than on the basis of absolute performance
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Tirole20-29 - Tirole, J. 2006. Theory of Corporate Finance....

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