Graduation Year
Spring 2014
Document Type
Open Access Senior Thesis
Degree Name
Bachelor of Arts
Department
Economics
Reader 1
Lisa K. Meulbroek
Terms of Use & License Information
Rights Information
© 2014 Jessica Pence
Abstract
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.
Recommended Citation
Pence, Jessica, "The Deadweight Loss of Equity-Based Compensation" (2014). CMC Senior Theses. 947.
https://scholarship.claremont.edu/cmc_theses/947
Included in
Business Administration, Management, and Operations Commons, Corporate Finance Commons, Finance Commons, Finance and Financial Management Commons
