Executive Retention and Accelerated Option Vesting

Abstract

We document that firms can effectively retain executives by granting deferred equity pay. We show this by analyzing a unique regulatory change (FAS 123-R) that prompted 720 firms to suddenly eliminate stock option vesting periods. This allowed CEOs to keep an additional $1.5 million in equity when departing the firm, and we find that voluntary CEO departure rates subsequently rose from 6% to 19%. Our identification strategy exploits FAS 123-R's almost-random timing, which was staggered by firms' fiscal year ends. Firms that experienced departures suffered negative stock price reactions, and responded by increasing compensation for remaining and newly hired executives.