Cash versus share payouts in relative performance plans

Timmermans, Oscar ORCID: 0000-0003-2220-0057 (2024) Cash versus share payouts in relative performance plans. Accounting Review. ISSN 0001-4826

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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.

Item Type:	Article
Official URL:	https://aaahq.org/Research/Journals/The-Accounting...
Additional Information:	© 2024 American Accounting Association
Divisions:	Accounting
Subjects:	H Social Sciences > HD Industries. Land use. Labor > HD28 Management. Industrial Management H Social Sciences > HF Commerce > HF5601 Accounting
JEL classification:	G - Financial Economics > G3 - Corporate Finance and Governance > G30 - General J - Labor and Demographic Economics > J3 - Wages, Compensation, and Labor Costs > J33 - Compensation Packages; Payment Methods M - Business Administration and Business Economics; Marketing; Accounting > M1 - Business Administration > M12 - Personnel Management M - Business Administration and Business Economics; Marketing; Accounting > M4 - Accounting and Auditing > M41 - Accounting
Date Deposited:	29 May 2024 15:00
Last Modified:	14 Sep 2024 10:07
URI:	http://eprints.lse.ac.uk/id/eprint/123696

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