The Advantages of Using Earnings for Compensation: Matching Delivered Performance

31 Pages Posted: 8 Oct 2008

See all articles by Michael J. Barclay

Michael J. Barclay

University of Rochester - Simon School (Deceased)

Dan Gode

affiliation not provided to SSRN

S.P. Kothari

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Multiple version iconThere are 2 versions of this paper

Date Written: June 2000

Abstract

We show that the greater the extent to which a performance measure matches delivered performance, the simpler and more robust are the compensation plans based on it. In some settings stock price changes match delivered performance poorly because they anticipate it. This introduces three problems with price-based plans relative to an earnings-based plan. First, the price-based plans become complex because they require knowing the extent to which prices anticipate the future. Second, price-based plans are less robust to unforeseen events. Third, price-based plans require period-by-period changes in pay-for-performance relationship even when the underlying production function remains unchanged. Earnings-based plans are used in these settings if earnings better match delivered performance.

Suggested Citation

Barclay, Michael J. and Gode, Dan and Kothari, S.P., The Advantages of Using Earnings for Compensation: Matching Delivered Performance (June 2000). NYU Working Paper No. DHANANJAY (DAN) K. GODE-06. Available at SSRN: https://ssrn.com/abstract=1280704

Michael J. Barclay (Contact Author)

University of Rochester - Simon School (Deceased)

N/A

Dan Gode

affiliation not provided to SSRN

No Address Available

S.P. Kothari

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

E52-325
Cambridge, MA 02142
United States
617-253-0994 (Phone)
617-253-0603 (Fax)

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