In order to maximize shareholder value, firms attempt to align the incentives of the executives with those of the shareholders by giving them equity as a portion of their compensation package. The terms associated with this equity compensation forces the executives to hold undiversified portfolios, resulting in a sizeable deadweight loss. This paper uses the formula developed by Meulbroek (2001)1 to calculate the dollar value of this deadweight loss, in order to quantify the costs associated with equity-based compensation. We find that the 56 executives in our data set have a combined deadweight loss of $70 billion, and that on average they are losing $1.25 billion each. These results raise the question of whether the incentive alignment is worth the large costs associated with it, and why firms continue to use equity as a form of compensation.
| Identifer | oai:union.ndltd.org:CLAREMONT/oai:scholarship.claremont.edu:cmc_theses-1898 |
| Date | 01 January 2014 |
| Creators | Pence, Jessica |
| Publisher | Scholarship @ Claremont |
| Source Sets | Claremont Colleges |
| Detected Language | English |
| Type | text |
| Format | application/pdf |
| Source | CMC Senior Theses |
| Rights | © 2014 Jessica Pence |
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