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Earnings‐Based Bonus Compensation
Author(s) -
Câmara António
Publication year - 2009
Publication title -
financial review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.621
H-Index - 47
eISSN - 1540-6288
pISSN - 0732-8516
DOI - 10.1111/j.1540-6288.2009.00226.x
Subject(s) - earnings , compensation (psychology) , economics , jump , executive compensation , econometrics , brownian motion , earnings response coefficient , microeconomics , incentive , mathematics , accounting , statistics , psychology , physics , quantum mechanics , psychoanalysis
This article studies the cost of contingent earnings‐based bonus compensation. We assume that the firm has normal and abnormal earnings. The normal earnings result from normal firm activities and are modeled as an arithmetic Brownian motion. The abnormal earnings result from surprising activities (e.g., introduction of an unexpected new product, an unexpected strike) and are modeled as a compound Poisson process where the earnings jump sizes have a normal distribution. We investigate, in a simple general equilibrium model, how normal and abnormal earnings affect the cost of contingent bonus compensation to the firm.