Frederic W. Cook & Co. Inc.’s 2014 Director Compensation Report indicates that non-employee director compensation increased modestly since last year, with increases ranging from 4% to 7%. Although no new design trends were observed, the streamlining of director compensation continues through (1) replacing meeting fees with higher cash retainers implying that director attendance is a prerequisite of board service, (2) denominating equity grants as a dollar value rather than as a number of shares to mitigate year-over-year valuation changes, and (3) shifting from stock options to full-value shares to strengthen the alignment of directors’ and shareholders’ interests.
Posts Tagged ‘Equity-based compensation’
In our paper, Strategic News Releases in Equity Vesting Months, which was recently made publicly available on SSRN, we study the link between the equity vesting schedules of CEOs and the timing of corporate news releases. We show that, in months in which the CEO has equity vesting, the firm releases more news. This is an easy way to pump up the short-term stock price, as news attracts attention to the stock. This attention also increases trading volume, which allows the CEO to cash out his equity in a more liquid market. Indeed, we find that these news releases lead to significant increases in the stock price and trading volume in a 16-day window, but the effect dies down over 31 days, consistent with a temporary attention boost. The median CEO cashes out all of his vesting equity within seven days—within the window of price and volume inflation.
Publicly traded companies are required by the SEC and the stock exchanges to obtain shareholder approval when such companies seek to implement a new long‐term equity plan or increase the share reserve pursuant to such plans.
Companies comply with this requirement by seeking shareholder approval through the annual proxy process. Institutional Shareholder Services (ISS), the large proxy advisory firm retained by many institutional investors for proxy voting advice, offers its services to institutional clients by evaluating such proposals. One of the tools used by ISS in developing its voting advice is a financial model referred to as the Shareholder Value Transfer (SVT) Model that attempts to assign a cost to each company’s equity plan. ISS’ proprietary SVT model contains numerous hidden values and algorithms a company cannot readily replicate. If the SVT Model results in an assigned cost that falls outside the boundaries of what is acceptable to ISS, ISS will submit a negative vote recommendation.
On October 15, 2014, Institutional Shareholder Services (“ISS”) released proposed amendments to its proxy voting policies for the 2015 proxy season. ISS is seeking comments by 6:00 p.m. EDT on October 29, 2014.  ISS has stated that it expects to release its final 2015 policies on or around November 7, 2014. The policies as revised will apply to meetings held on or after February 1, 2015.
As issues around cost transparency and best practices in equity-based compensation have evolved in recent years, ISS proposes updates to its Equity Plans policy in order to provide for a more nuanced consideration of equity plan proposals. As an alternative to applying a series of standalone tests (focused on cost and certain egregious practices) to determine when a proposal warrants an “Against” recommendation, the proposed approach will incorporate a model that takes into account multiple factors, both positive and negative, related to plan features and historical grant practices.
Feedback from clients and corporate issuers in recent years, beginning with the 2011-2012 ISS policy cycle, indicates strong support for the proposed approach, which incorporates the following key goals:
Stock options have been a part of executive pay at major U.S. corporations for approximately 100 years. They have had an important role for approximately 70 years, starting in the 1950s. They have gone through periods of extraordinary popularity (e.g., the 1990s) and have been less popular during periods when the stock markets were in the doldrums. They survived the change in accounting rules (2006) that now require them to be a charge against earnings. This post examines this history and takes a look at where options are today. 
In our paper, Executive Gatekeepers: Useful and Divertible Governance?, which was recently made publicly available on SSRN, we study the role of executive gatekeepers in preventing governance failures, and the counter-incentive effects created by equity compensation. Specifically, we examine the following two questions. First, do executive gatekeepers actually improve governance in the average firm? Second, does the effectiveness of gatekeepers in ensuring compliance and/or reducing corporate misconduct depend on their incentive contracts?
Three categories of performers are rewarded for value creation in U.S. public corporations. They are: (1) the executives who manage the corporations; (2) the directors who oversee the performance of these corporations; and (3) the individual asset managers and others who provide investment services to investors who own, directly or indirectly, these corporations.
The following post takes a look at the correlation between the long-term incentive compensation of these three categories of performers and long-term value creation in U.S. public corporations that is attributable to them. In fact, such correlation appears to be limited. In addition, the article will consider a definition of “long-term” value creation, the roles of these three categories of performers in creating “long-term” value and the methods of compensating these different categories of performers in their respective roles in “long-term” value creation.
Corporations rely on dividends, share repurchases, or a combination of both payout methods to return earnings to their shareholders. Over the last decade, the importance of the dominating payout method—dividends—seems to be somewhat eroded at UK firms, with an increasing number of firms combining share repurchases with dividends. What explains the surge in the use of combined share repurchases and dividends in the UK? Is there a link between firm’s payout decision and executive remuneration?
How do shareholders motivate managers to pursue innovations that result in patents when substantial potential costs exist to managers who do so? This question has taken on special importance as promoting these kinds of innovations has become a critical element of not only the competition between companies, but also the competition between nations. In our paper, Motivating Innovation in Newly Public Firms, forthcoming in the Journal of Financial Economics, we address this question by providing empirical tests of predictions arising from recent theoretical studies of this issue.