Executive Equity Compensation and Incentives: A Survey

[...]We also concentrate our survey on literature that testseconomic hypotheses within samples of U.S. firms. However,we believe that much of our discussion can be generalized tofirms throughout the world. Bushman and Smith (2003)present a broad overview of how differences in country-specificfactors lead to different governance and compensationstructures that arise endogenously within those environments.In many other countries, investors are not as well-protectedand widely dispersed ownership is not optimal. In thesesettings, managers and their families retain much ownershipand explicit equity-based compensation may be unnecessary (La Porta, Lopez-De-Silanes, and Shleifer 1999). Importantfeatures of the U.S. environment include a regulatory systemthat emphasizes the protection of shareholders and requiresthat each firm transparently disclose material informationabout its finances and its contracts, and a government thatgrants individuals and firms much freedom to seek their owngood. These features contribute to widely dispersed ownershipin many U.S. firms, in which managers own a small fraction ofthe equity, and where the relatively low managerial ownershiplevels make it potentially important to write contracts thatemphasize equity ownership. As a working theoreticalrepresentation, we assume that the use of equity compensationin the United States is endogenously determined within thebroad legal, regulatory, and governance environment faced byU.S. firms.[...]