Exploring Changes in Management Compensation Structure in Canada: Evidence on the Consequences of Requiring Options Expensing

Abstract

Existing research findings are mixed on whether increased executive stock option (ESO) use is due to favorable accounting treatment enabling earnings management (EM) and opportunism, or to efforts to improve pay for performance. We use archival data to investigate executive compensation changes in 215 Canadian companies for the years surrounding the amendment to Handbook Section 3870, which requires expensing of ESOs. We find that while ESO use was reduced, ESOs still dominate share-based compensation. Of the opportunism and EM antecedents examined, only political visibility is significant. The substitution rate of RSUs for ESOs is more equal post-amendment, in keeping with firms being more willing to use RSUs once ESOs had to be expensed. However, the pay for performance relationship has not improved post-amendment, even for firms who most reduced ESO use. Unlike U.S. studies, our results overall provide little support for opportunism or EM being a key driver of increased ESO use prior to the amendment.