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Cash versus share payouts in relative performance plans

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  • Timmermans, Oscar

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 to 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.

Suggested Citation

  • Timmermans, Oscar, 2024. "Cash versus share payouts in relative performance plans," LSE Research Online Documents on Economics 123696, London School of Economics and Political Science, LSE Library.
    • Handle: RePEc:ehl:lserod:123696
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    File URL: http://eprints.lse.ac.uk/123696/
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    More about this item

    Keywords

    idiosyncratic and systematic risk; relative performance evaluation; cash bonuses; payout convexity; executive incentive-compensation;
    All these keywords.

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
    • M12 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Personnel Management; Executives; Executive Compensation
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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