Why do firms use equity-based pay? Managerial compensation and stock price informativeness

Benjamin Bennett (The Ohio State University), Gerald Garvey (Blackrock), Todd Milbourn (Washington University), Zexi Wang (University of Bern)

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

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Year of publication:	[2019]
Authors:	Bennett, Benjamim ; Garvey, Gerald ; Milbourn, Todd ; Wang, Zexi
Publisher:	[Columbus, Ohio] : The Ohio State University, Fisher College of Business, Charles A. Dice Center for Research in Financial Economics
Subject:	Executive compensation \| Equity-based pay \| Stock price informativeness \| Börsenkurs \| Share price \| Führungskräfte \| Managers \| Managervergütung \| Aktienoption \| Stock option \| Vergütungssystem \| Compensation system \| Leistungsentgelt \| Performance pay \| Lohn \| Wages \| Theorie \| Theory