An analysis of net-outcome contracting with applications to equity-based compensation

• 成果类型: Article
• 署名作者: Hofmann, Christian; Huddart, Steven; Pfeiffer, Thomas
• 署名单位: University of Munich; Pennsylvania Commonwealth System of Higher Education (PCSHE); Pennsylvania State University; Pennsylvania State University - University Park; University of Vienna
• 刊物名称: REVIEW OF ACCOUNTING STUDIES
• ISSN/ISSBN: 1380-6653
• DOI: 10.1007/s11142-021-09666-w
• 发表日期: 2023
• 页码: 1657-1689
• 关键词: EMPLOYEE STOCK-OPTIONS; moral hazard; risk-aversion; incentives; valuation

摘要

Options, restricted stock, bonuses tied to total shareholder return, and similar equity-based compensation contracts stipulate payments that depend on stock price. Any such contract is a function of shareholder value net of the compensation payment, because stock price (1) is proportional to this net value or net outcome and (2) anticipates compensation-related payments and dilution. The net outcome, in turn, is reduced by the payment and so depends on the contract. Standard moral hazard analyses, wherein contractual payments are based on the gross outcome before any payment to the agent, overlook this dependency. We characterize the optimal net-outcome contract, describe its shape and pay-for-performance sensitivity, contrast it with the optimal gross-outcome contract, and discuss implications for equity-based compensation arrangements.