Disentangling Managerial Incentives from a Dynamic Perspective

The contract stipulates (a) the profit-contingent cash remunerations for each period, (b) the number of shares that will be granted to the manager at the end of the first period, and (c) the restrictions (if any) on the sale of the granted stock. [...] Finally we determine endogenously both the number of shares granted to the manager, and the fraction of the granted stocks that the manager is not allowed to sell at the beginning of period 2, and we consider the granting of shares rather than stock options. [...] A two-period contract is said to be self-enforcing if in period 2 neither party nds it advantageous to terminate the contract and pay the compensation in order to pursue the outside option.4 The two-period contract speci es (a) the cash remuneration formula for period 1, (b) the amount of shares granted to the manager at the end of period 1, and the restrictions on the sales of these shares; and [...] The contract speci es that, at the end of period 1, the manager will be granted a fraction of the shares of the rm, and that she cannot sell a fraction a of these granted shares. [...] The contract speci es that at the end of period 1, after dividends have been distributed, a fraction of the shares is awarded to the manager, as non-voting shares,6 and the manager is allowed to sell at most (1 a) , where a 2 [0; 1] is the fraction of granted stocks that must be kept until the end.