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The Structure of Performance-Vested Stock Option Grants

In: Essays in Accounting Theory in Honour of Joel S. Demski

Author

Listed:
  • Joseph J. Gerakos

    (University of Pennsylvania)

  • Christopher D. Ittner

    (University of Pennsylvania)

  • David F. Larcker

    (Stanford University)

Abstract

U.S. executive compensation traditionally relies on stock options that vest over time. Recently, however, a growing number of institutional investors have called for the use of performance-vested options that link vesting to the achievement of performance targets. We examine the factors influencing the structure of performance-vested stock option grants to U.S. CEOs. We find that performance-vested options comprise a greater proportion of equity compensation in firms with lower stock return volatility and market-to-book ratios, and in those with new external CEO appointments, providing some support for theories on the options’ incentive and sorting benefits. However, firms with larger holdings by pension funds are less likely to completely replace traditional options with performance-vested options, and make traditional options a greater percentage of option grants, suggesting that token performance-vested option grants may also be used to placate pension funds that are calling for their use. In addition, our exploratory examination of performance-vesting criteria finds similarities and differences to prior studies on the choice of performance measures in compensation contracts.

Suggested Citation

  • Joseph J. Gerakos & Christopher D. Ittner & David F. Larcker, 2007. "The Structure of Performance-Vested Stock Option Grants," Springer Books, in: Rick Antle & Frøystein Gjesdal & Pierre Jinghong Liang (ed.), Essays in Accounting Theory in Honour of Joel S. Demski, chapter 0, pages 227-249, Springer.
    • Handle: RePEc:spr:sprchp:978-0-387-30399-4_11
    DOI: 10.1007/978-0-387-30399-4_11
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    Citations

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    Cited by:

    1. Kuang, Yu Flora & Qin, Bo, 2009. "Performance-vested stock options and interest alignment," The British Accounting Review, Elsevier, vol. 41(1), pages 46-61.
    2. Bettis, J. Carr & Bizjak, John & Coles, Jeffrey L. & Kalpathy, Swaminathan, 2018. "Performance-vesting provisions in executive compensation," Journal of Accounting and Economics, Elsevier, vol. 66(1), pages 194-221.
    3. Bo Zhang & Hongliu Yuan & Xiaoqiang Zhi, 2017. "ROE as a performance measure in performance-vested stock option contracts in China," Frontiers of Business Research in China, Springer, vol. 11(1), pages 1-17, December.
    4. Stephen J. Terry & Toni M. Whited & Anastasia A. Zakolyukina, 2020. "Information versus Investment," Working Papers 2020-110, Becker Friedman Institute for Research In Economics.
    5. Merz, Alexander, 2017. "What have we learned from SFAS 123r and IFRS 2? A review of existing evidence and future research suggestions," Journal of Accounting Literature, Elsevier, vol. 38(C), pages 14-33.
    6. Gao, Zhan & Hwang, Yuhchang & Wu, Wan-Ting, 2017. "Contractual features of CEO performance-vested equity compensation," Journal of Contemporary Accounting and Economics, Elsevier, vol. 13(3), pages 282-303.
    7. Cready, William M. & Dai, Zhonglan & Ma, Guang & Nanda, Vikram, 2024. "Information in unexpected bonus cuts: Firm performance and CEO firings," Journal of Empirical Finance, Elsevier, vol. 76(C).

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