The Optimal Schedules of Incentives and Cash Flows

Felix Zhiyu Feng, Robin Yifan Luo, and Mark M. Westerfield
Working Paper, July 2026

[PDF] [SSRN Version]

Summary

We investigate optimal incentive schemes when a manager can both boost immediate cash flows and invest in durable asset quality, while the principal observes only aggregate output. Optimal contracts initially have high duration incentives, but all contracts have times of short-termism, particularly after losses.

Abstract

We model delegated management when an agent can invest in durable asset quality or raise instantaneous cash flow. Both actions add value, but only aggregate output is observable, so incentivizing durable investment necessarily also incentivizes instantaneous effort. The flexibility to schedule incentives makes durable investment relatively cheaper to induce, and the optimal contract begins back-loaded. As promised future incentives accumulate, further back-loading becomes increasingly costly, and the contract can eventually become front-loaded. Negative cash-flow surprises raise promised future incentives. The resulting dynamics generate mean reversion in cash flows and other empirical implications for the duration of cash flows and incentives.

Cite as

Feng, Felix Zhiyu, Robin Yifan Luo, and Mark M. Westerfield. 2026. “The Optimal Schedules of Incentives and Cash Flows.” Working paper, July 2026.

BibTeX

@unpublished{FengLuoWesterfield2026,
  author = {Feng, Felix Zhiyu and Luo, Robin Yifan and Westerfield, Mark M.},
  title  = {The Optimal Schedules of Incentives and Cash Flows},
  note   = {Working paper},
  month  = {July},
  year   = {2026},
  url    = {https://markwesterfield.com/papers/FLW-Optimal-Schedules.html}
}

This is a working paper; the posted PDF is the July 2026 draft. Updated October 5, 2026.