Production and hedging implications of executive compensation schemes

Sagi Akron, Simon Benninga

Research output: Contribution to journalArticlepeer-review


This paper connects executive compensation with hedging and analyzes a crucial shareholders and managers agency source that evolves from the pricing of the hedging device. The shareholders are risk-neutral, while the risk-averse manager hedges the price risk of the manufactured quantity, and his compensation package includes equity-linked compensation-stock grants. Only when the hedging instrument's pricing includes a risk premium, hedging is costly to the shareholders, while it is costless to the manager. Then from the owners' point of view, we observe managerial over-hedging, increasing in the equity-linked compensation level. This result leads to a violation of the classical production and hedging separation theorem. We conclude that, in the case where the hedging device's pricing bears a risk premium, shareholders can regulate the corporate value diversion to managers through diminishing the managerial equity-linked compensation scheme or by putting restrictions on the extent of hedging activities of executives.

Original languageEnglish
Pages (from-to)119-139
Number of pages21
JournalJournal of Corporate Finance
Issue number1
StatePublished - Feb 2013

Bibliographical note

Funding Information:
This research was supported by a grant to Akron from the Orgler Doctoral Fellowship Fund at the Faculty of Management of Tel Aviv University and by a grant to Benninga from the Israel Science Foundation and the Israel Institute of Business Research at the Faculty of Management of Tel Aviv University. We thank Axel Adam-Müller, Gil Aharoni, Amitay Alter, Yaacov Amihud, Söhnke Bartram, Sasson Bar Yossef, Avraham Beja, Nahum Biger, Oded Braverman, Jonathan Carmel, David Disatnik, Eti Einhorn, Rafi Eldor, Dan Galai, Yehoshua Hoffer, Avner Kalay, Elli Kraizberg, Yoram Kroll, Abrahm Levi, Yaffa Machnes, Greg Pawlina, Zvi Safra, Yossi Spiegel, Dan Weiss, Zvi Wiener, Rafal Wojakowski, and Jumana Zahalka, for helpful comments and assistance. We also thank the participants of departmental seminars at Lancaster University, Tel Aviv University, Bar Ilan University, The Hebrew University, The Inter-Disciplinary Center Herzelia, The University of Haifa, and the MFA2011 session participants and its Corporate Finance Best Paper Award Committee.


  • Corporate hedging devices
  • Executive equity-linked compensation
  • Frictions
  • Optimal managerial compensation scheme
  • Regulation
  • Separation theorems

ASJC Scopus subject areas

  • Business and International Management
  • Finance
  • Economics and Econometrics
  • Strategy and Management


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