Performance-Vesting Provisions in Executive Compensation

Abstract

The usage of performance-vesting (p-v) equity awards to top executives in large U.S. companies has grown from 20 to 70 percent from 1998 to 2012. We measure the effects of p-v provisions on value, delta, and vega of equity-based compensation. We find large differences in the value of p-v awards reported in company disclosures versus economic value. We also find that equity-based grants continue to convey significant compensation convexity (vega) after ASC 718 (2005) and that, counter to recent claims in the literature, our analysis empirically reaffirms the presence of a causal relation between compensation convexity (vega) and firm risk.

Keywords: Performance-vesting provisions, executive compensation, stock awards, option awards, time-vesting, performance measures, CEO pay, corporate governance

JEL Classification: M52, M55, J33, G34; G32, G13, M41