Performance Share Plans: Valuation and Empirical Tests

Craig W. Holden

Indiana University - Kelley School of Business - Department of Finance

Daniel Sungyeon Kim

Peking University HSBC Business School

June 10, 2016

Performance share plans are an increasingly important component of executive compensation. A performance share plan is an equity-based, long-term incentive plan where the number of shares to be awarded is a quasi-linear function of a performance result over a fixed time period. A special case is a performance-vested share plan, which provides a fixed number of shares whenever a performance result exceeds a threshold goal. We begin by documenting the size and importance of performance share plans and performance-vested share plans. Next, we derive closed-form formulas for the value of a performance share plan or performance-vested share plan when the performance measure is: (1) a non-traded measure following an Arithmetic Brownian Motion (e.g., earnings per share), (2) a non-traded measure following a Geometric Brownian Motion (e.g., revenue), or (3) a rank-order tournament of traded asset returns that are following Arithmetic Brownian Motions (e.g., percentile of ranked stock returns). Finally, we compare the actual payout of plans to our new valuation formulas, the reported values on proxy statements, and heuristic values. We find that our valuation formulas do significantly better or at least tie reported value and heuristic value in matching the magnitude of actual payout in all subsamples. We also find that our valuation formulas are more accurate or tie in all subsamples. The policy implication is that FASB should consider requiring that grant date fair value be estimated using valuation formulas such as ours.

Number of Pages in PDF File: 51

Keywords: Executive compensation, Performance share plan, Performance-vested share plan

JEL Classification: G34

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Date posted: November 18, 2012 ; Last revised: June 12, 2016

Suggested Citation

Holden, Craig W. and Kim, Daniel Sungyeon, Performance Share Plans: Valuation and Empirical Tests (June 10, 2016). Available at SSRN: http://ssrn.com/abstract=2177363 or http://dx.doi.org/10.2139/ssrn.2177363

Contact Information

Craig W. Holden (Contact Author)
Indiana University - Kelley School of Business - Department of Finance ( email )
Kelley School of Business
1309 E. 10th St.
Bloomington, IN 47405
United States
812-855-3383 (Phone)
812-855-5875 (Fax)
HOME PAGE: http://www.kelley.iu.edu/cholden

Daniel Sungyeon Kim
Peking University HSBC Business School ( email )
University Town
Shenzhen, Nanshan District 518055
Feedback to SSRN

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