Why Do Firms Use Equity-based Pay? Managerial Compensation and Stock Price Informativeness

Authors

Benjamin Bennett, Texas Christian University - M.J. Neeley School of BusinessFollow
Gerald T. Garvey, BlackRock, IncFollow
Todd T. Milbourn, Southern Methodist University (SMU) - SMU Cox School of BusinessFollow
Zexi Wang, Lancaster University - Department of Accounting and FinanceFollow

Publication Date

5-2-2019

Abstract

We study the motive of using equity-based pay in executive compensation: the risk-sharing motive versus the performance-measuring motive. The empirical design goes through the relationship between equity-based pay and stock price informativeness (SPI). We find equity-based pay decreases in SPI, which is consistent with the risk-sharing motive but inconsistent with the performance-measuring motive. The SPI effect on compensation is stronger in financially-constrained firms, more diversified firms, and firms with less product market competition. SPI increases pay efficiency through a larger proportion of option pay, fewer perquisites, and greater pay-for-skill. We address potential endogeneity concerns by investigating the changes in compensation of managers switching between firms with different SPI.

Document Type

Article

Keywords

Executive compensation, Equity-based pay, Stock price informativeness

Disciplines

Finance

DOI

10.2139/ssrn.3125875

Source

SMU Cox: Finance (Topic)

Language

English