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| Author: | Camara, A. |
| Title: | The Pricing of Relative Performance Based Incentives for Executive Compensation |
| Journal: | Journal of Business Finance and Accounting
2001 : VOL. 28:9-10, p. 1149-1188 |
| Index terms: | EXECUTIVES COMPENSATION PRICING |
| Language: | eng |
| Abstract: | 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 (1) decrease the cost of their compensation packages; (2) undertake more risky capital-investment projects; and (3) avoid providing so high-powered incentives to increase shareholder wealth. |
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