The influence of firm and executive characteristics on performance-vested stock option grants

Motivated by the considerable changes over the last two decades in the form and composition of executive remuneration schemes and the increasing use of performance-vested stock options (PVSOs), this study examines the determinants of PVSO grants. Using data on 4193 executive-year observations of 1373 executive directors in 243 FTSE 350 non-financial companies from 1999 to 2004, I examine the factors that influence PVSO grants at both the firm and the executive level. While controlling for unobservable industry, firm, and executive level fixed effects, the evidence shows that the PVSO grants awarded to individual executives are associated with observable features of corporate governance and indicators of managerial power. More specifically, the results support the following statements: (1) good corporate governance structures facilitate the use of PVSO plans; (2) the proportion of PVSO grants in the total compensation package is smaller for top mangers with more controlling power; (3) PVSO plans are less frequently used to compensate managers who are approaching their retirement and/or have a large equity stake in the firm; (4) relative to non-CEO executives, CEOs are more likely to be rewarded with PVSOs.

► Performance-vested stock options (PVSOs) are designed to reward manager for real economic performance.
► Good corporate governance structures facilitate the use of PVSO plans.
► The proportion of PVSO grants in the total compensation package is smaller for top mangers with more controlling power.
► PVSO plans are less frequently used to compensate managers who are approaching their retirement and/or have a large equity stake in the firm.
► Relative to non-CEO executives, CEOs are more likely to be rewarded with PVSO plans.