Contractual Features of Performance-Vested Executive Equity Compensation

Abstract

This paper investigates the determination and the interdependence of the contractual features of performance-vested (p-v) executive equity compensation. We first report that firms with less volatile returns, better stock performance, and more complex businesses are more likely to use market metrics than accounting metrics. We next show that firms using market metrics are more likely to adopt relative performance evaluation (RPE) and long performance horizons, both of which help to reduce noise in market metrics. More importantly, we find that RPE, the performance horizon, and the number of metrics are interdependent. These findings reveal intricate relations among the contractual features and deepen our understanding of the design of p-v equity compensation.