EVA-Based Two-Period Compensation Plan: A Game Approach

This paper studies the characteristics of the EVA-based compensation plan between a firm´s shareholder (principal) and his manager (agent) by using a dynamic game with incomplete information. We present a two-period principal-agent model to investigate the optimal solutions for the short-term contract and the long-term contract, respectively, and compare their differences. Under both contracts, the agent´s effort levels are positively relevant to the incentive weights but are not related to the fixed wages. The optimal incentive weights and thereby the agent´s effort levels are positively relevant to the agent´s productivity, and are negatively relevant to the agent´s effort cost coefficient, risk-aversion degree and the uncertainties. Also, we find that under the short-term contract, the agent takes more effort in both periods than those under the long-term contract, and the principal gets more payoffs