Performance-based pay : sharing prosperity and misery.

• Main Author: Low, Buen Sin.
• Other Authors: Nanyang Business School
• Format: Research Report
• Published: 2008
• Subjects: DRNTU::Business
• Online Access: http://hdl.handle.net/10356/7040
• Institution: Nanyang Technological University

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.