A compensation scheme for optimal investment decisions

D. Cardoso, P.J. Pereira

Research output: Contribution to journalArticlepeer-review


We derive an optimal compensation scheme that aims to eliminate inadequate misaligned managerial actions ensuring optimal investment decisions. With this model, the owners of the option to invest do not need to follow the future evolution of project value drivers in order to guarantee optimal behavior. The optimal contract scheme is a correct balance between effort costs, fixed wages, and a value-sharing bonus. As shown, even small deviations from the optimal compensation scheme may lead to highly sub-optimal decisions. The model is extended to accommodate impatience behavior by the managers or the shareholders.
Original languageEnglish
Pages (from-to)150-159
JournalFinance Research Letters
Publication statusPublished - 2 May 2015


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