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.

Highlights

  • Stock compensation and option compensation have been two important components in executive equity-based compensation in the US S&P 1500 firms

  • This paper explores to find out the determinants of the change of Chief Executive Officers (CEOs) equity-based compensation structure

  • One of our focuses is on the determinants of the change of CEO equity-based compensation

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Summary

Introduction

Stock compensation and option compensation have been two important components in executive equity-based compensation in the US S&P 1500 firms. Hayes et al (2012) show that all firms dramatically reduce their usage of stock options after the adoption of FAS 123R. It is necessary to further investigate the determinants of the change of CEO equity-based compensation structure (including stock and option compensation) and study the relation between CEO equity-based compensation and firm risk-taking behavior after the adoption of FAS 123R. The objectives of paying CEOs with equity-based compensation (including stocks and options) are to motivate its CEOs and other executives to make their companies better, because this kind of compensation could provide a direct link between companies’ performance and executives’ wealth. Equity-based compensation attracts highly skilled executives to join their companies, because these people will select firms paying more performance-based compensation rather than firms paying fixed salary only. Goergen and Renneboog (2011) stated that stock options induce managerial risk taking, and may increase managers’ incentives to exert effort

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