Download This PaperCash versus Share Payouts in Relative Performance Plans
64 Pages Posted: 29 Apr 2020 Last revised: 22 May 2024
Date Written: May 22, 2024
Abstract
This study examines the risk-taking properties associated with incentive plans that use relative performance evaluation, with a focus on the form of payout, whether in cash or shares. By analyzing determinants and consequences of payout form choice, I find that share-based plans offer risk-averse managers weaker incentives to pursue projects with idiosyncratic risk compared to cash plans. This occurs because share plans—unlike cash plans—expose managers to systematic performance trends, as payout values are linked to stock prices. Additionally, I document that the variation in risk-taking incentives depends on expected relative performance and the strength of the incentives. Overall, this study’s findings suggest that commonly used share-based relative performance plans might not always motivate managers to pursue innovative projects with high idiosyncratic risk when projects with systematic risk are available.
Keywords: idiosyncratic and systematic risk, relative performance evaluation, cash bonuses, payout convexity, executive incentive-compensation
JEL Classification: G30, J33, J41, M12, M41
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