Performance-based pay : sharing prosperity and misery.
Low, Buen Sin.
Date of Issue2006
College of Business (Nanyang Business School)
This paper discusses the risk transfer effect and wealth transfer effect of three types of firm-wide cash performance-based pay plans - the incentive pay plan, the pay-at-risk plan, and the pure misery-sharing plan. The valuation models for each type of performance-based pay plan are developed to quantify their wealth transfer effect between shareholders and employees. The models also suggest that there is a risk transfer effect from employees to the shareholders for all three types of performance-based pay. This risk transfer effect is larger for firms that have a higher financial leverage or have a more volatile business environment.
Nanyang Technological University