English, Article, Journal or magazine article edition: On the Valuation and Incentive Effects of Executive Cash Bonus Contracts Lionel Martellini; Branko Urosevic

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Bookmark: http://trove.nla.gov.au/version/155378
Physical Description
  • preprint
Language
  • English

Edition details

Title
  • On the Valuation and Incentive Effects of Executive Cash Bonus Contracts
Author
  • Lionel Martellini
  • Branko Urosevic
Physical Description
  • preprint
Notes
  • Executive compensation packages are often valued in an inconsistent manner: while employee stock options (ESOs) are typically valued ex-ante, cash bonuses are valued ex-post. This renders the existing valuation models of employee compensation packages theoretically unsatisfactory and, potentially, empirically distortive. In this paper, we propose an option-based framework for ex-ante valuation of cash bonus contracts. After obtaining closed-form expressions for ex-ante values of several frequently used types of bonus contracts, we utilize them to explore the e¤ects that the shape of a bonus contract has on the executive’s attitude toward risk-taking. We, also, study pay-performance sensitivity of such contracts. We show that the terms of a bonus contract can dramatically impact both risk-taking behavior as well as pay-performance incentives. Several testable predictions are made, and venues of future research outlined.
  • Executive compensation, cash bonus, incentives, risk-taking behavior
  • RePEc:upf:upfgen:784
Language
  • English
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