Richard Lambert, David Larcker, and Robert Verrecchia, "Portfolio Considerations in Valuing Executive Compensation," Journal of Accounting Research, Vol. 29, No. 1, 1991, (p. 129).

This paper analyzes the valuation of a compensation contract from a manager's perspective. This perspective is appropriate, for example, in research on the incentive effects of a compensation plan, because such effects are determined by how the manager's actions affect his valuation of his compensation. In contrast, in a study of the cost-effectiveness of a compensation plan, the shareholder's perspective is appropriate. Measuring the value to a manager of his compensation is difficult because some of the diverse components of compensation packages (e.g., executive stock options and restricted stock) have payoffs that are uncertain when the compensation is granted. In most empirical studies, each component is values independently (without consideration of the structure of the compensation package as a whole), and these values are summed. Moreover, the values are frequently determined using formulas for publicly traded securities with "similar" payoff structures (i.e., from the perspective of security market participants).

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