Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/313122 
Year of Publication: 
2022
Citation: 
[Journal:] Review of Accounting Studies [ISSN:] 1573-7136 [Volume:] 28 [Issue:] 3 [Publisher:] Springer US [Place:] New York, NY [Year:] 2022 [Pages:] 1657-1689
Publisher: 
Springer US, New York, NY
Abstract: 
Options, restricted stock, bonuses tied to total shareholder return, and similar equity-based compensation contracts stipulate payments that depend on stock price. Any such contract is a function of shareholder value net of the compensation payment, because stock price (1) is proportional to this net value or "net outcome" and (2) anticipates compensation-related payments and dilution. The net outcome, in turn, is reduced by the payment and so depends on the contract. Standard moral hazard analyses, wherein contractual payments are based on the gross outcome before any payment to the agent, overlook this dependency. We characterize the optimal net-outcome contract, describe its shape and pay-for-performance sensitivity, contrast it with the optimal gross-outcome contract, and discuss implications for equity-based compensation arrangements.
Subjects: 
Dilution
Moral hazard
Team compensation
Optimal contracting
Pay-for-performance sensitivity
Stock option
JEL: 
D86
J33
M41
Persistent Identifier of the first edition: 
Creative Commons License: 
cc-by Logo
Document Type: 
Article
Document Version: 
Published Version

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