Do Firms Replenish Executives' Incentives after Equity Sales?

Abstract

After selling firm equity, executives' incentives to maximize shareholder value may decrease. How do boards respond? Theory shows boards can restore executives' incentives by shifting subsequent pay from cash toward equity. Unobservable firm-level changes that cause executives to sell equity and simultaneously reduce their need for incentives may bias estimates. I therefore compare selling and non-selling executives at the same firm. I find that boards replenish only 7% of incentives after sales, allowing some executives to accumulate substantially fewer incentives than others. I show that boards may instead focus on benchmarking annual equity grants to those of peer firms.

Keywords: Executive compensation, agency theory, efficient contracting, managerial incentives, equity sales, equity pay

JEL Classification: G11, G32, G34, J33