In this paper we examine the factors affecting the structure
of executives‘ compensation packages. We focus particularly on the role of
various types of delayed compensation as means of "bonding" executives to
their firms.
The basic problem is to design a compensation package that rewards
actions that are in the 1ong—run interest of the stockholders. Firms must
take into account (1) their ability to discern unfortunate circumstances
from mismanagement; (2) the extent to which a compensation package forces
the executive to face risks beyond his control; and (3) the willingness of a given executive to bear this risk. we use our theory to interpret some executive compensation data from the early 1970's.