Graduation Year

Spring 2014

Document Type

Open Access Senior Thesis

Degree Name

Bachelor of Arts



Reader 1

Lisa K. Meulbroek

Terms of Use & License Information

Terms of Use for work posted in Scholarship@Claremont.

Rights Information

© 2014 Jessica Pence


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.