The Causes and Risk-Taking on the Change of CEO Equity-Based Compensation Structure

Abstract

This paper explores to find out the determinants of the change of CEO equity-based compensation structure. We use the US nonfinancial listed companies as sample and find that when the change of stock return and size increase positively, the percentage of stock compensation and the stock-minus-option compensation relative to last year increase. Moreover, when the change of CEO duality increases positively, the percentage of stock-compensation and the percentage of stock-minus-option compensation relative to last year decrease. The empirical results represent that when firms perform better, sizes are bigger, and when there is a supervision mechanism of CEOs, stock compensation relative to last year will rise. Furthermore, the change of entrenchment index is positively correlated with equity-based compensation relative to last year. We also investigate the relation between equity-based compensation and risk-taking. Option compensation will increase firms’ stock return risk, but stock compensation will decrease firms’ stock return risk. Although there is no obvious conclusion that whether stocks or options are better, this study shows that stock compensation dominates option compensation in the view of risk-taking. We recommend that executive equity-based compensation should mostly consist of restricted stock.