On the valuation and incentive effects of executive cash bonus contracts

摘要: Executive compensation packages are often valued in an inconsistent manner: while employee stock options (ESOs) typically ex‐ante, i.e., before uncertain ties resolved, cash bonuses ex‐post, by discounting the realized grants. Such a lack of consistency can, potentially, distort empirical results. A related, yet mostly overlooked, problem is that when ex‐post valuation used pay‐performance measures cannot be well defined. Consistent use ex‐ante for all components package would simultaneously resolve both these problems and provide natural framework analysis agency problems. In this paper, we perform bonus contracts as if executive’s performance were measured company price, demonstrate how shape contract influences attitude toward risk, study sensitiv ty such contracts. We commence demonstrating typical executive with linear incentive zone has pay off structure equivalent to portfolio standard binary European call so value given combination Black Scholes prices, strike prices at boundary points zone. Assuming risk neutral can choose level price volatility selecting set projects origination, show terms dramatically affect taking behavior incentives. Our results extended non‐linear zones, share vesting risk.