Incentive Programs and its Incentives

Baran Ozan & Nasim Muhammad Ramzan

Student thesis: Master thesis

Abstract

The aim of this thesis is to investigate incentive programs based on the Principal-agent-theory. The theory is based on a dilemma which is: How can a principal ensure that the agent is going to act in the principal’s best interest? The dilemma is very complex, when it is applied to larger listed companies. The complexity is first time shown, when the principal is not able to monitor the agent. Secondly, the complexity is shown when considering the elements before establishing an incentive program. Finally, the complexity is shown when deciding the incentive methods for the agent, as these methods result in different motivation- and risk-profiles for the agent. Theoretically the thesis primarily focuses on the Principal-agent-theory. In order for the principal to get the desired return from his investment, an agent is hired to handle this need in the best interest of the principal. Unfortunately, this is not always the case which is why incentive programs are a useful tool. This thesis mainly uses qualitative research to investigate the phenomena. The aim of the interviews is to contribute to the subject with different perspectives. Additionally, these perspectives are used to discuss what to consider when establishing and designing an optimal incentive program to solve the Principal-agent-problem by creating a shared interest between them. By analyzing incentive programs in the Nasdaq OMXC25 index, it has been found that possibly there is a correlation between establishing incentive programs and the growth in the stock price. Secondly, the analysis has shown that different incentive programs result in different incentives for the agent, which has resulted in multiple recommendations for an optimal incentive program in this thesis. Our discussion and recommendation suggest that the short-term incentive program should be a balance between the objective and subjective criteria when evaluating the agent’s performance. The agent should be rewarded with a cash bonus, where a part of this bonus is converted into stocks. Additionally, our recommendation for the long-term incentive program suggests that the agent should be remunerated with restricted stock units with a vesting period between three to five years.

EducationsMSc in Finance and Accounting, (Graduate Programme) Final Thesis
LanguageDanish
Publication date2019
Number of pages128
SupervisorsMichael Jakobsen