Stock incentive plans in Europe: Empirical evidence and design implications

Abstract

Traditionally, stock incentive plans have been used by American companies for two primary purposes: as tools of corporate governance to align the interests of top managers and shareholders, and to motivate managers to maximize shareholders’ value. Recently, just as the misuse of stock option plans is the subject of scathing criticism, such plans are seeing widespread dissemination in several European countries. Empirical studies conducted by both consulting companies and management scholars outline the increasing diffusion of stock incentive plans designed by European companies and the main features of these plans. The characteristics of the process through which they are designed and of the equity incentives implemented raise the concerns of investors and academics about the ability of such plans to align managers’ interests to shareholders’. Since stock incentive plans were created and developed in the Anglo-Saxon capitalistic system, the last part of the paper reviews the reasons why firms should set up these plans. The aim is to ascertain whether European companies have good reasons to create SIPs and if the features of the incentive plans designed by these executives are consistent with achieving these goals. To answer these questions, a theoretical model is presented to provide a framework for designing stock incentive plans that are tailored to the characteristics of the company, specific aims it wishes to pursue, and the relative institutional environment.