Abstract: “Recent empirical studies in Behavioral Agency Model (see Pepper and Gore, 2012) on executive compensations make evidence how the agent attitude to risk influences the subjectively perceived incentive value. The paper sets out a compensation schedule matching multiple goals: (1) aligning the incentives with the executive subjectively perceived fair and equitable compensation; (2) discouraging the executive excessive risk-taking; (3) providing an approach to calculate the certainty equivalent of the uncertain compensation. To hit the first goal we suggest to use the target-oriented decision approach (see Bordley and LiCalzi, 2000) able to guide the agent in eliciting her subjective value function through the assessment of the (uncertain) target to hit. The proposed approach is compatible with prospect theory (see Kahneman and Tversky, 1979). With reference to the second goal involving the problem on how prevent moral hazard phenomena, we suggest to insert an event-linked option. That war”

Keywords: Behavioral Agency Model; Behavioral Theory of the firm; Executive incentives; Utility function assessment; Contract theory; Moral hazard; Risk.