Performance-based pay : sharing prosperity and misery.
This paper discusses the risk transfer effect and wealth transfer effect of three types of firm-wide cash performance-based pay plans - the incentive pay plan, the pay-at-risk plan, and the pure misery-sharing plan. The valuation models for each type of performance-based pay plan are developed to qu...
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| Format: | Research Report |
| Published: |
2008
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| Online Access: | http://hdl.handle.net/10356/7040 |
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| Institution: | Nanyang Technological University |
| Summary: | This paper discusses the risk transfer effect and wealth transfer effect of three types of firm-wide cash performance-based pay plans - the incentive pay plan, the pay-at-risk plan, and the pure misery-sharing plan. The valuation models for each type of performance-based pay plan are developed to quantify their wealth transfer effect between shareholders and employees. The models also suggest that there is a risk transfer effect from employees to the shareholders for all three types of performance-based pay. This risk transfer effect is larger for firms that have a higher financial leverage or have a more volatile business environment. |
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