The Pricing of Relative Performance Based Incentives for Executive Compensation

António Câmara

Journal of Business Finance & Accounting, 2001, vol. 28, issue 9‐10, 1115-1139

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 (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.

Date: 2001
References: Add references at CitEc
Citations: View citations in EconPapers (5)

Downloads: (external link)
https://doi.org/10.1111/1468-5957.00410

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:bla:jbfnac:v:28:y:2001:i:9-10:p:1115-1139:b

Ordering information: This journal article can be ordered from
http://www.blackwell ... bs.asp?ref=0306-686X

Access Statistics for this article

Journal of Business Finance & Accounting is currently edited by P. F. Pope, A. W. Stark and M. Walker

More articles in Journal of Business Finance & Accounting from Wiley Blackwell
Bibliographic data for series maintained by Wiley Content Delivery ().