Document Type
Article
Publication Date
2016
ISSN
2380-5013
Publisher
Now Publishers
Language
en-US
Abstract
Over the last ten years, performance-based equity pay, and particularly performance shares, have displaced stock options as the primary instrument for compensating executives of large, public companies in the U.S. This article examines that transformation, analyzing the structure and incentive properties of these newly important instruments and evaluating the benefits and risks from an investor’s perspective. Notable observations include the following: Although technically “stock” instruments, performance shares mimic the incentive characteristics of options. But performance shares avoid the tax, accounting, and other constraints that have led to uniform grants of non-indexed, at the money options. Performance share plans can be designed to be effectively in, at, or out of the money and these plans often employ relative performance measurement that makes them analogous to rarely observed indexed stock options. But the opacity of performance share plans creates risks for investors, and the two accounting approaches applicable to these instruments both result in systematic undervaluation for executive pay disclosure and financial reporting purposes. Given the growing dominance of these instruments, this article advocates the adoption of a mark-to-market accounting regime for all equity compensation.
Recommended Citation
David I. Walker,
The Way We Pay Now: Understanding and Evaluating Performance-Based Executive Pay
,
1
Journal of Law, Finance, and Accounting
395
(2016).
Available at:
https://doi.org/10.1561/108.00000010
Please note the file available on SSRN may not be the final published version of this work.
