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Do compensation plans with performance targets provide better incentives?
Pinto, Helena Widdicks, M.
Pinto, Helena
Widdicks, M.
Publication Date
2014-12
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© 2014 Elsevier. Reproduced in accordance with the publisher's self-archiving policy. This manuscript version is made available under the CC-BY-NC-ND 4.0 license http://creativecommons.org/licenses/by-nc-nd/4.0/
Peer-Reviewed
Yes
Open Access status
openAccess
Accepted for publication
23/03/2014
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Abstract
Guided by academic literature, industry practice and policy recommendations, we analyze a wide range of option and restricted stock plans with exercise and vesting conditions that may be contingent on stock price performance. To assess the effectiveness of these plans at attracting and providing incentives to executives, we create compensation plans with fixed firm cost and executive valuation and calculate their expected total lifetime incentives. We show that performance vesting targets provide the least cost effective incentives, performance exercise targets provide the largest risk incentives, option plans are generally superior to restricted stock plans, and calendar vesting is only efficient up to a maximum of three years. Performance exercise targets can increase the expected total lifetime incentives provided by compensation plans, but in general, standard options with short vesting periods provide the most cost effective pay-for-performance incentives.
Version
Accepted manuscript
Citation
Pinto H and Widdicks M (2014). Do compensation plans with performance targets provide better incentives? Journal of Corporate Finance, 29: 662–694.
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Article