A Comparative Study on the Effects of the Equity-Based Incentives for Risk Neutral Managers

We assumed the managers are risk neutral, and use sensitivity to pay-performance to represent the effect on equity-based incentive. Then, we use the principal-agency model to compare the effect on restricted stock incentive with the effect on stock option incentive. We got the conclusion as following, the effect on restricted stock incentive is more than that on stock option incentive when grant price of restricted stock equals to exercise price of stock option, but the effect on stock option incentive is more than that on restricted stock incentive when grant price of restricted stock equals to zero. This conclusion will give some theoretic guidance for Chinese listed companies to choose the manner of equity-based incentive when they have finished their equity division reform.