Modeling Equity Compensation under Accounting Contingencies

John Bizjak, Swaminathan Kalpathy and Rex Thompson

Accounting and Finance Research, 2016, vol. 5, issue 1, 164

Abstract: Of late, both U.S. and International firms have increased the granting of performance-contingent equity awards to their executive officers. Beyond simple stock options, these awards frequently include accounting-based performance targets. Failure to meet or exceed these targets causes award forfeiture. While now a common component in executive pay, little is known about how to value these instruments. In this paper, we model the expected payoff from an equity award with accounting-based payout conditions. The model incorporates numerous characteristics of awards seen in practice, including the coupling of stock price and accounting targets, multiple accounting targets, sliding payout schedules, and the adoption of both “and†and “or†conditions that trigger payout. We also translate the expected payoff into an approximate present value. Given the growing prevalence of performance-contingent features in executive pay, this exercise is important to academics, board members and shareholders, along with other market participants and regulators.

Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://www.sciedupress.com/journal/index.php/afr/article/download/8463/5401 (application/pdf)
https://www.sciedupress.com/journal/index.php/afr/article/view/8463 (text/html)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:jfr:afr111:v:5:y:2016:i:1:p:164

Access Statistics for this article

More articles in Accounting and Finance Research from Sciedu Press Contact information at EDIRC.
Bibliographic data for series maintained by Sciedu Press ().