CEO equity pay with pre-determined dollar values

What is it about?

Firms often determine CEO equity grants based on a predetermined dollar value (value-based equity grant) instead of on the number of shares (share-based grant). CEOs receiving value-based equity pay have weaker incentives to work hard or innovate. However, boards make such equity grants to attract and retain talented CEOs. Overall, this paper alerts boards to the unintended consequences of pursuing a target pay level or pay structure because such practices can lead to value-based equity grants in CEO compensation.

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Why is it important?

It is important for two reasons. First, our findings should help alert boards to the unintended consequences of pursuing a target pay level or structure (e.g., presetting pay structure and compensation benchmarking). Second, we show a conflict between retention and incentives, the two main goals of executive compensation. Because boards and investors differ drastically about which goal is more important, conflicts between them can arise.