Reward for failure and executive compensation in institutional investors |
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| Institution: | 1. Department of Management Control, University of Chile, Diagonal Paraguay 257, Of. 1903, 8330015 Santiago, Chile;2. School of Economics and Business, Catholic University of Chile, Chile;1. Departamento de Química, Módulo 13, Universidad Autónoma de Madrid, Campus de Excelencia UAM-CSIC Cantoblanco, 28049 Madrid, Spain;2. Laboratorio de Química Teórica Computacional (QTC), Facultad de Química, Pontificia Universidad Católica de Chile, Santiago, Chile;1. School of Mathematics and Statistics, Southwest University, Chongqing 400715, People’s Republic of China;2. Departamento de Matemática, Pontificia Universidad Catolica de Chile, Avda. Vicuña Mackenna 4860, Macul, Chile;1. Department of Economics, University of Bologna, piazza Scaravilli n.2, I-40126 Bologna, Italy;2. Business School, Edge Hill University, St Helens Road, Ormskirk, Lancashire L39 4QP, United Kingdom;3. Department of Economics, University of Guelph, Guelph, Ontario N1G 2W1, Canada;1. University of Castilla-La Mancha, Escuela Técnica Superior de Ingenieros Industriales, 13071 Ciudad Real, Spain;2. Pontificia Universidad Católica de Chile, Industrial and Systems Engineering Department, Santiago, Chile;1. Department of Construction Engineering and Management, School of Engineering, Pontificia Universidad Católica de Chile, 4860 Vicuña Mackenna Av., Santiago, RM 7820436, Chile;2. Center for Sustainable Urban Development (CEDEUS), Pontificia Universidad Católica de Chile, Chile;3. Department of Building, Civil and Environmental Engineering, Concordia University, 1455 de Maisonneuve Blvd. West, Montreal, Quebec H3G1M8, Canada;4. Department of Mechanical Engineering, The University of Texas at San Antonio, San Antonio, TX 78249, USA |
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| Abstract: | We propose a model of delegated portfolio management specialized in alternative investments, i.e., those with a high-return and high-risk profile. It is shown that in this context, as a reward for risk-taking scheme is optimal, a counter-intuitive reward for failure can also be desirable. This property emerges because it can be optimal to compensate extreme returns (even low ones) to encouraging managers to shape highly innovative portfolios. It is argued that this structure resembles compensation practices questioned in the context of the last financial crisis, such as golden parachutes and golden coffins. Implementation via equity and bonuses is also analyzed. |
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| Keywords: | Executive compensation Portfolio management Corporate governance Golden parachutes Non-monotone likelihood ratio property |
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