Stock-Based Incentives: Design and Implications for Firm Performance

Abstract:     
We examine performance implications of stock-based incentive programs. While agency theory makes a strong case for stock-based incentives, empirical evidence of the effect on firm performance so far is mixed. Using a novel hand-collected data-set of German Prime Standard firms, we also find that on average stock-based long-term incentives do not improve firm performance. However, when we take a closer look at the design of the incentive structures, we find that ill-designed programs go along with poor post performance, while ambitious programs boosts firm performance. We confirm these findings by using different performance measures, addressing endogenity concerns, and controlling for various governance mechanisms like ownership and board structures, as well as other design dimensions of the stock-based incentive plans.

Keywords: Incentives, management compensation, stock-based compensation, corporate governance

Working Paper Series