Optimal Performance Targets

Summary

The study delves into executive compensation contracts, particularly focusing on a type of contract where managers receive a bonus if they surpass a predefined performance threshold. These contracts are analyzed in terms of their ability to address the moral hazard problem between firms and managers, under various conditions including risk neutrality and risk aversion. The paper evaluates how these contracts can effectively motivate desired effort levels from managers, considering the complexities introduced by risk and manager risk preferences.