Stock-based compensation plan: an analysis of the determinants of its use

Marcelo Daniel Araujo Ermel,Vanessa Medeiros

doi:10.1590/1808-057x201907620

Abstract

ABSTRACT This study’s aim was to investigate the main aspects that determined the use of the stock-based compensation model and the variables that influence the amount paid. The article fills the gap in the previous debate regarding the variables that affect the decision to offer stock-based remuneration, as well as revealing the factors that impact its magnitude and providing a more robust statistical treatment with regards to endogeny. Brazil is known to be a country where the agency conflict between controlling and minority shareholders predominates, and so it is important to understand the determinants of adoption and of the amount paid to managers using stock options, since remuneration can be used as a form of tunneling. This study identified a possible trade-off between cash and stock compensation, in view of increased company indebtedness. It also found that in the Brazilian market this type of remuneration is not related to governance and performance. A panel data regression was used with fixed effects in the firm and industry*year to eliminate the possible bias arising from constant heterogeneities in time for the firms and shocks in the industries in a particular year. In addition, to identify the determinants, we used a logistic regression with panel data and fixed effect in industry*year. The study sample comprised 287 companies listed on the Bolsa, Brasil, Balcão (B3) exchange. This research shows that 40% of the companies in the period from 2010 to 2016 adopted stock-based compensation plans; however, the amount paid is still low, at 0.03% of total company assets. The results indicate that in the Brazilian market variables such as investment opportunities and company size increase the likelihood of adopting the employee stock options plan (ESOP). In addition, regarding the amount paid, this is negatively related to company leverage, indicating that in possible liquidity shocks the companies opt to compensate managers with shares to reduce their exposure to systematic risks.

Highlights

Marcelo Daniel Araujo Ermel & Vanessa MedeirosIn the current competitive environment, companies are dedicating more and more attention to potential internal instability factors, such as human resource management, conflict of interests, and the need to motivate employees (Manzoor, 2012; Shin & Konrad, 2017)
The results reveal that factors such as growth opportunities, dividend payments, firm size, and return on assets are positively related with the probability of adopting employee stock options plan (ESOP)
Aspects such as company leverage and ownership structure are negatively related with the adoption of ESOPs

Summary

Introduction

In the current competitive environment, companies are dedicating more and more attention to potential internal instability factors, such as human resource management, conflict of interests, and the need to motivate employees (Manzoor, 2012; Shin & Konrad, 2017). This process gains an even more important connotation in the field of publicly-traded companies, in which the separation between shareholders and managers tends to cause problems such as information asymmetry, the search for self-satisfaction to the detriment of satisfying the hiring party, and a divergence in interests between agent and hirer (Jensen & Meckling, 1976). Controlling shareholders will use strategies to divert the organization’s resources in order to benefit themselves, such as selling company assets at low cost to other companies only they own, hiring services from their own companies at above-market prices, or granting loans and other operations, as shown by Johnson, La Porta, Lopez-de-Silanes, and Shleifer (2000), who call practices such as these “tunneling”

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