Do compensation plans with performance targets provide better incentives?

Helena Pinto, Martin Widdicks

Research output: Contribution to journalArticle

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.

Original languageEnglish (US)
Pages (from-to)662-694
Number of pages33
JournalJournal of Corporate Finance
Volume29
DOIs
StatePublished - Dec 1 2014

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Keywords

  • Executive compensation
  • Incentives
  • Options
  • Performance target plans
  • Restricted stock

ASJC Scopus subject areas

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

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