NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Six Challenges in Designing Equity-Based Pay

Brian J. Hall

NBER Working Paper No. 9887
Issued in August 2003
NBER Program(s):   CF   LS

This paper analyzes why the primary goal of the equity-pay explosion--creating long-run ownership incentives for top executives--has often been difficult to achieve in practice. More generally, I describe six challenges in the design of equity-based pay plans and discuss potential solutions. The six challenges involve: 1. mismatched time horizons; 2. gaming; 3. the value-cost wedge'; 4. the leverage-fragility tradeoff; 5. aligning risk-taking incentives; and 6. avoiding excessive compensation. The paper also discussed the merits of stock versus options and concludes that restricted stock is often a superior form of compensation.

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Document Object Identifier (DOI): 10.3386/w9887

Published: Brian J. Hall, 2003. "Six Challenges In Designing Equity-Based Pay," Journal of Applied Corporate Finance, Morgan Stanley, vol. 15(3), pages 21-33.

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