The Pricing Principle Of The Compensation Mechanism For Performance Commitment And Its Application In Equity Investment

The compensation mechanism for performance commitment is an agreement which is signed between investors and target enterprises in equity investment.It is essentially a valuation adjustment mechanism in which the value of the target enterprises is readjusted by its performance and goals at a point of time or a certain period of time in the future.In recent years,the compensation mechanism for performance commitment has been applied in many fields in China.Besides being widely used in the field of venture capital and private equity,mergers and acquisitions,split share structure reform,private placement and management incentives have gradually emerged as a figure of the compensation mechanism for performance commitment.The compensation mechanism can reduce the valuation of the risk and solve the problem of information asymmetry between the two sides of the transaction.It can also achieve effective management incentive and meet the financing needs of enterprise development.But there is widespread phenomenon of high commitments and high valuation in target enterprises.It caused the target enterprises often sign some extremely unfair compensation mechanism which results in the failure of target enterprises.They not only suffered huge losses but also lost control of their business.The main reason for this situation is that the target enterprises in China are not fully aware of the compensation mechanism and the lack of its pricing technology.Underthis background,this paper takes the compensation mechanism for performance commitment signed by Yongle & Morgan Stanley as the research object.Through the analysis of this case,the pricing principle and application of the compensation mechanism has been studied.This paper has discussed more than a simple statement of the basic content,the necessity and application status of compensation mechanism.Through the using of real option pricing theory to analyze and calculate,the valuation of abstract compensation mechanism makes the decisions of investment and financing more specifically and digitally.In this paper,the author also combined with the pricing process and results of the analysis,offered some application suggestions which can avoid the target enterprises take a huge risk or be in much passive situation,also promote both sides of trade to achieve win-win.