Valuation and incentives of exotic performance-vesting stock grants with path-dependent (price- and earnings-based) vesting schedules

We quantify analytically the incentive properties of performance-vesting (p-v) stock grants and explore how these grants mitigate agency problems associated with the separation of ownership and control: P-v stock grants with a... [ view full abstract ]

We quantify analytically the incentive properties of performance-vesting (p-v) stock grants and explore how these grants mitigate agency problems associated with the separation of ownership and control: P-v stock grants with a price-based (earnings-based, resp.) vesting schedule compound managers' ownership incentives in a multiplicative (additive, resp.) fashion. However, p-v stock grants may convey inefficient incentives if the threshold performance hurdle is  too high or in the case of high risk-taking incentives. We show that p-v stock grants with path-dependent vesting schedules achieve a better alignment between shareholders and managers than p-v grants whose vesting schedule nests standard European call options.