Contractual Features of Performance-Vested Executive Equity Compensation

Abstract:     
This paper investigates the determination of and the interdependence between the salient contractual features of executives’ performance-vested equity compensation. We premise that key performance metrics are used to induce incentives while other contractual features to reduce excess risk in compensation. Empirically, we find evidence that the determinants for key metrics are incentive inducing. We next show that RPE, performance horizon, and the number of metric types are related to key metrics in ways which reduce noise in metrics. Moreover, the contractual features are interdependent: RPE is associated with longer performance horizons and more metric types, and longer performance horizons with fewer metric types. These findings reveal intricate relationships between contractual features and deepen our understanding of the design of performance-vested equity compensation.

Number of Pages in PDF File: 61

Keywords: Equity compensation, performance metric, performance period, relative performance evaluation

working papers series