The Incentives Of Equity Based Compensation And Wealth
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| Author | : Chris Armstrong |
| Publisher | : |
| Total Pages | : 66 |
| Release | : 2012 |
| Genre | : |
| ISBN | : |
This study estimates chief executive officers' (CEO) subjective valuation of their equity holdings using their revealed preferences conveyed by their decisions to hold or exercise their stock options and to hold or sell their equity shares. Using a random utility framework, I find that the subjective value of equity holdings is associated with both economic and behavioral factors, and that the impact of these factors varies considerably across CEOs. In addition, I find that most CEOs value their equity holdings below the corresponding risk-neutral value, which provides new insight relative to prior literature that examines how insiders value equity-based compensation. This study also provides preliminary evidence regarding the relationship between the sensitivity of CEOs' subjective value of their equity holdings to changes in stock price (subjective delta) and volatility (subjective vega) and future operating performance, investment and financial risk, and stock price performance. The results frequently diverge from those of prior studies that examine the relationship between risk-neutral equity portfolio deltas and these future performance measures. Collectively, the results of this study highlight the complexity of measuring the equity incentives construct and suggest that an executive's subjective valuation of equity is a critical component.
| Author | : Christopher S. Armstrong |
| Publisher | : |
| Total Pages | : 178 |
| Release | : 2007 |
| Genre | : Employee stock options |
| ISBN | : 9780549353485 |
This study estimates chief executive officers' (CEO) subjective valuation of their equity holdings using their revealed preferences conveyed by their decisions to hold or exercise their stock options and to hold or sell their equity shares. Using a random utility framework, I find that the subjective value of equity holdings is associated with both economic and behavioral factors, and that the impact of these factors varies considerably across CEOs. In addition, I find that most CEOs value their equity holdings below the corresponding risk-neutral value, which provides new insight relative to past literature that examines how insiders value equity-based compensation. This study also provides preliminary evidence regarding the relationship between the sensitivity of CEOs' subjective value of their equity holdings to changes in stock price (subjective delta) and volatility (subjective vega) and future operating performance, investment and financial risk, and stock-price performance. The results frequently diverge from those of previous studies that examine the relationship between risk-neutral equity portfolio deltas and these future performance measures. Collectively, the results of this study highlight the complexity of measuring the equity incentives construct and suggest that an executive's subjective valuation of equity is a critical component.
| Author | : Steven Balsam |
| Publisher | : Academic Press |
| Total Pages | : 410 |
| Release | : 2002 |
| Genre | : Business & Economics |
| ISBN | : 9780120771264 |
General readers have no idea why people should care about what executives are paid and why they are paid the way they are. That's the reason that The Wall Street Journal, Fortune, Forbes, and other popular and practitioner publications have regular coverage on them. This book not only proposes a reason - executives need incentives in order to maximize firm value (economists call this agency theory) - it also describes the nature and design of executive compensation practices. Those incentives can take the form of benefits (salary, stock options), or prerquisites (reflecting the status of the executive within the organizational culture.
| Author | : Eric R. Brisker |
| Publisher | : |
| Total Pages | : 45 |
| Release | : 2014 |
| Genre | : |
| ISBN | : |
We hypothesize that managers who receive high equity-based compensation have greater incentive to avoid ownership dilution by timing their seasoned equity offers to periods when investors temporarily overvalue their stock. We provide empirical support for this hypothesis using a measure of equity-based compensation that reflects the sensitivity of the top five executives' wealth (based on ownership of stock, options, and restricted shares) to a 1% change in stock price. We find that firms associated with high equity-based compensation for top executives experience abnormally low stock returns and relatively unfavorable changes in operating performance in the three-year period following the issue. Overall, the findings support the premise that managers whose wealth is most sensitive to stock price changes are more likely to act in the interest of current shareholders by issuing equity when they believe their stock is overvalued.
| Author | : Robert W. Kolb |
| Publisher | : Oxford University Press |
| Total Pages | : 231 |
| Release | : 2012-08-02 |
| Genre | : Business & Economics |
| ISBN | : 0199829594 |
The scholarly literature on executive compensation is vast. As such, this literature provides an unparalleled resource for studying the interaction between the setting of incentives (or the attempted setting of incentives) and the behavior that is actually adduced. From this literature, there are several reasons for believing that one can set incentives in executive compensation with a high rate of success in guiding CEO behavior, and one might expect CEO compensation to be a textbook example of the successful use of incentives. Also, as executive compensation has been studied intensively in the academic literature, we might also expect the success of incentive compensation to be well-documented. Historically, however, this has been very far from the case. In Too Much Is Not Enough, Robert W. Kolb studies the performance of incentives in executive compensation across many dimensions of CEO performance. The book begins with an overview of incentives and unintended consequences. Then it focuses on the theory of incentives as applied to compensation generally, and as applied to executive compensation particularly. Subsequent chapters explore different facets of executive compensation and assess the evidence on how well incentive compensation performs in each arena. The book concludes with a final chapter that provides an overall assessment of the value of incentives in guiding executive behavior. In it, Kolb argues that incentive compensation for executives is so problematic and so prone to error that the social value of giving huge incentive compensation packages is likely to be negative on balance. In focusing on incentives, the book provides a much sought-after resource, for while there are a number of books on executive compensation, none focuses specifically on incentives. Given the recent fervor over executive compensation, this unique but logical perspective will garner much interest. And while the literature being considered and evaluated is technical, the book is written in a non-mathematical way accessible to any college-educated reader.
| Author | : Eli Ofek |
| Publisher | : |
| Total Pages | : 28 |
| Release | : 1999 |
| Genre | : |
| ISBN | : |
We find that executives sell shares of previously owned stock after receiving equity-based incentive compensation, counteracting boards' attempts to tie their wealth to firm value. Executives sell stock during years in which they receive new stock options or restricted stock, and some evidence indicates further selling over time if options move into-the-money. When options are exercised, managers sell a large majority of shares acquired. Effects are strongest for executives who already hold many shares, while stock-based compensation does appear to increase the holdings of managers with low ownership. Although valuation theorists who study executive compensation frequently assume that executives cannot hedge the risks of stock-based pay, our research provides evidence to the contrary.
| Author | : Eli Ofek |
| Publisher | : |
| Total Pages | : 40 |
| Release | : 2008 |
| Genre | : |
| ISBN | : |
We find that executives sell shares of previously owned stock after receiving equity-based incentive compensation, counteracting boards' attempts to tie their wealth to firm value. Executives sell stock during years in which they receive new stock options or restricted stock, and some evidence indicates further selling over time if options move into-the-money. When options are exercised, managers sell a large majority of shares acquired. Effects are strongest for executives who already hold many shares, while stock-based compensation does appear to increase the holdings of managers with low ownership. Although valuation theorists who study executive compensation frequently assume that executives cannot hedge the risks of stock-based pay, our research provides evidence to the contrary.
| Author | : David E. Gumpert |
| Publisher | : Lauson Publishing |
| Total Pages | : 200 |
| Release | : 2000 |
| Genre | : Business & Economics |
| ISBN | : |
| Author | : Fan Yu |
| Publisher | : |
| Total Pages | : 75 |
| Release | : 2013 |
| Genre | : Executives |
| ISBN | : |
I find that a CEO who is better monitored tends to have smaller total contractual incentive pay, measured by the delta of the CEO's total portfolio. The realized wealth-to-performance sensitivity (WPS) of such a CEO, however, is not significantly different from that of a CEO who is worse monitored. The findings suggest that monitoring and contractual incentives can be substitutes, rather than complements assumed by prior corporate governance research. I further study how a firm manages the total contractual incentives provided to its CEO. I find that a firm adjusts the structure of equity-based compensation, specifically, the split between restricted stock and options, to manage it. Better monitored firms tend to have higher proportions of restricted stock in the CEO's total equity-based compensation. The higher ratio is associated with lower total contractual incentives and total pay level. The findings suggest that how a board provides equity-based compensation matters.
| Author | : Stephen R. Poland |
| Publisher | : 1x1 Media |
| Total Pages | : 131 |
| Release | : 2018-10-15 |
| Genre | : Business & Economics |
| ISBN | : 1938162145 |
This highly visual guide offers startup founders and employees a “nuts and bolts” view of how stock options and other forms of equity compensation work in early-stage startups. Throughout this guide numerous mini-infographics illustrate the key concepts founders need to know and show the relationships between stock option grants, vesting timelines, exercise timing, and associated tax implications. In detail, this Founder’s Pocket Guidewalks entrepreneurs though the following elements: Startup Equity Compensation Basics: Sharing Equity with Your Team The first section of this guide is structured to help founders build a base of understanding about the numerous definitions and terminology related to startup equity compensation and stock options. Topics covered include: · A brief refresher on startup equity in preparation for delving into the details of stock options and other forms of equity compensation. · A quick review of how startup equity ownership is shared between the various stakeholder of a startup including the founders, investors, and employees. · The fundamental mechanics of how startup stock options work, including option grants, exercising, vesting, and selling of stock shares. · A detailed review of equity compensation terminology and definitions, such as vesting, strike price, fair market value, and spread. · An explanation of each of the most common types of equity compensation including Restricted Stock, Incentive Stock Options, Non-Qualified Stock Options, and Restricted Stock Units. Equity Compensation Types in Detail The next section of this guide reviews each of the most common types of equity compensation, including detailed components such as tax implications, vesting and exercise parameters, and other IRS rules governing the ownership of each equity type. The following equity compensation types are covered: · Restricted Stock (RS) · Incentive Stock Options (ISOs) · Early Exercise Incentive Stock Options (EE-ISOs) · Nonstatutory Stock Options (NSOs) · Early Exercise Nonstatutory Stock Options (EE-NSOs) · Restricted Stock Units (RSU) Establishing Your Startup’s Equity Plan In the final part of this guide we dig deeper into the key areas founders need to consider when developing an equity plan for their startup, with specific focus on the following issues: · When to implement a formal equity incentive plan · What factors to consider when deciding how large the equity compensation pool should be · How to decide employee equity award amounts at the different stages of a startup’s lifecycle · What general steps to take to establish a equity compensation plan for your startup · What key information that must be communicated to employees about equity compensation awards · Which step-by-step calculations are needed to truly understand equity ownership percentages and value · How IRS and SEC rules impact private company equity compensation
