An analysis of net-outcome contracting with applications to equity-based compensation

Christian Hofmann (), Steven Huddart and Thomas Pfeiffer
Additional contact information
Christian Hofmann: Ludwig-Maximilians-Universität München, LMU Munich School of Management
Thomas Pfeiffer: University of Vienna

Review of Accounting Studies, 2023, vol. 28, issue 3, No 15, 1657-1689

Abstract: Abstract Options, restricted stock, bonuses tied to total shareholder return, and similar equity-based compensation contracts stipulate payments that depend on stock price. Any such contract is a function of shareholder value net of the compensation payment, because stock price (1) is proportional to this net value or “net outcome” and (2) anticipates compensation-related payments and dilution. The net outcome, in turn, is reduced by the payment and so depends on the contract. Standard moral hazard analyses, wherein contractual payments are based on the gross outcome before any payment to the agent, overlook this dependency. We characterize the optimal net-outcome contract, describe its shape and pay-for-performance sensitivity, contrast it with the optimal gross-outcome contract, and discuss implications for equity-based compensation arrangements.

Keywords: Dilution; Moral hazard; Team compensation; Optimal contracting; Pay-for-performance sensitivity; Stock option (search for similar items in EconPapers)
JEL-codes: D86 J33 M41 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://link.springer.com/10.1007/s11142-021-09666-w Abstract (text/html)
Access to the full text of the articles in this series is restricted.

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:spr:reaccs:v:28:y:2023:i:3:d:10.1007_s11142-021-09666-w

Ordering information: This journal article can be ordered from
http://www.springer.com/accounting/journal/11142

DOI: 10.1007/s11142-021-09666-w

Access Statistics for this article

Review of Accounting Studies is currently edited by Paul Fischer

More articles in Review of Accounting Studies from Springer
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().