The Pricing of Relative Performance Based Incentives for Executive Compensation
Since 1995, more than 50 percent of the firms in the "FTSE"-100 have granted rewards to their senior executives, the payoffs of which are contingent on the firm's stock return relative to a bench mark return over a given period (hereafter, relative performance incentives). This paper investigates and derives closed-form solutions for a class of relative performance incentives that have a positive payoff if, in addition to the traditional contingencies, the firm's stock return is higher than the market return times a threshold. Results suggest that UK firms, in practice, when relative performance incentives (RPI's) substitute absolute performance incentives (API's) tend to (i) decrease the cost of their compensation packages; (ii) undertake more risky capital-investment projects; and (iii) avoid providing so high-powered incentives to increase shareholder wealth. Copyright Blackwell Publishers Ltd 2001.
Year of publication: |
2001-11
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Authors: | Câmara, António |
Published in: |
Journal of Business Finance & Accounting. - Wiley Blackwell, ISSN 0306-686X. - Vol. 28.2001-11, 9&10, p. 1115-1139
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Publisher: |
Wiley Blackwell |
Saved in:
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