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Risk, Uncertainty and Time Discounting

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Abstract

In parallel with the widely reported inflation in executive pay around the world during the last 20 years, long-term incentives have come to represent an increasingly large proportion of total compensation. Although long-term incentives take many forms, they typically comprise a deferred award of company stock whose vesting is contingent upon the satisfaction of a time condition (e.g., that the holder is still employed by the company on the third anniversary of the date of award) and sometimes also on a financial performance condition (e.g., that the total shareholder return of the employing company outperforms that of comparator companies). In this chapter, I define long-term incentives broadly, to include share-based incentives such as stock options, restricted stock and performance shares, as well as equity-linked cash-based incentives, such as phantom options, and stock appreciation rights.

Keywords

  • Risk Aversion
  • Risk Index
  • Prospect Theory
  • Risk Averse
  • International Financial Reporting Standard

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  • DOI: 10.1057/9781137409256_4
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© 2015 Alexander Pepper

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Pepper, A. (2015). Risk, Uncertainty and Time Discounting. In: The Economic Psychology of Incentives. Palgrave Macmillan, London. https://doi.org/10.1057/9781137409256_4

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