Cash versus share payouts in relative performance plans

Oscar Timmermans

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: This study examines the risk taking properties associated with incentive plans that use relative performance evaluation, with a focus on the form of payout, whether in cash or shares. By analyzing determinants and consequences of payout form choice, I find that share-based plans offer risk-averse managers weaker incentives to pursue projects with idiosyncratic risk compared with cash plans. This occurs because share plans-unlike cash plans-expose managers to systematic performance trends, as payout values are linked to stock prices. Additionally, I document that the variation in risk taking incentives depends on expected relative performance and the strength of the incentives. Overall, this study's findings suggest that commonly used share-based relative performance plans might not always motivate managers to pursue innovative projects with high idiosyncratic risk when projects with systematic risk are available.

Keywords: idiosyncratic and systematic risk; relative performance evaluation; cash bonuses; payout convexity; executive incentive-compensation; executive incentive compensation (search for similar items in EconPapers)
JEL-codes: G30 J33 M12 M41 (search for similar items in EconPapers)
Pages: 39 pages
Date: 2024-11-01
New Economics Papers: this item is included in nep-hrm, nep-lma and nep-ppm
References: View references in EconPapers View complete reference list from CitEc
Citations:

Published in Accounting Review, 1, November, 2024, 99(6), pp. 451 - 489. ISSN: 0001-4826

Downloads: (external link)
http://eprints.lse.ac.uk/123696/ Open access version. (application/pdf)

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:ehl:lserod:123696

Access Statistics for this paper

More papers in LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library LSE Library Portugal Street London, WC2A 2HD, U.K.. Contact information at EDIRC.
Bibliographic data for series maintained by LSERO Manager ().