Explicit relative performance evaluation in performance-vested equity grants

Abstract

Using data from FTSE 350 firms, we examine factors influencing explicit relative performance evaluation (RPE) conditions in performance-vested equity grants. We provide exploratory evidence on whether the use or characteristics of RPE are associated with efforts to improve incentives by removing common risk, other economic factors discussed in the RPE literature, or external pressure to implement RPE. We find that many of these economic factors, including common risk reduction, are more closely related to specific relative performance conditions than to the firm-level decision to use RPE in some or all of their equity grants. We also find that greater external monitoring by institutional investors or others is associated with plans with tougher overall RPE conditions. The relative performance conditions are binding in most RPE plans, with nearly two-thirds of the grants vesting only partially or not vesting at all. Further, we find evidence that vesting percentages vary in RPE and non-RPE plans.Keywords restricted stock grant, equity plan, dividend playout ratio, stock option grant, compensation risk, RPE, equitybased pay, dividend yield, executive compensation contract, equity incentive, institutional investor, stock return volatility, London stock exchange, stock market performance, share price performance Abstract ______________________________________________________________________________ Using data from FTSE 350 firms, we examine the factors influencing the explicit use of relative performance evaluation (RPE) in performance-vested equity grants, and whether RPE is used to improve incentives or to opportunistically increase vesting and/or placate external parties calling for its use. We find little evidence that the simple decision to use or not use RPE is associated with the economic factors identified in RPE theories. Instead, these factors are associated with specific RPE performance conditions. The relative performance conditions are binding in most RPE plans, with nearly two-thirds of the grants vesting only partially or not vesting at all. However, we find no evidence that vesting percentages are higher in RPE plans than in non-RPE plans, and no evidence that RPE is used opportunistically to increase vesting and compensation.

The Impact of Investor Horizon on Say-on-Pay Voting

“…In this way, our analysis complements prior studies by identifying an important determining factor of Say-on-Pay voting patterns. Second, our study reconciles prior conflicting findings related to Say-on-Pay effectiveness and shareholder interest in this mechanism (Alissa, 2015;Carter, Ittner and Zechman, 2009;Conyon and Sadler, 2010;Gregory-Smith et al, 2014).…”

Preaching water but drinking wine? Relative performance evaluation in international banking

“…Prior studies have put forth a variety of factors that are related to the usage of RPE in compensation contracts in UK and US firms (Carter et al 2009;Gong et al 2011;Albuquerque 2014). They do not, however, examine the relation of one factor at a time on the usage of RPE while controlling for other factors.…”

“…Gong et al (2011) investigate explicit disclosures on RPE in the US to identify the factors that prompt the use of RPE in compensation contracts in 2006. Carter et al (2009) examine the use of RPE in performance-vested equity grants in a sample of UK firms in 2002. This section examines international firms over a longer time span.…”

“…Albuquerque (2014) and Gong et al (2011) find that the level of RPE in CEO compensation contracts is negatively associated with a firm's level of growth options. Carter et al (2009) examine the disclosure of performance-based conditions in equity grants and document that growth options are inversely related to the performance-based conditions. Albuquerque (2014) argues that high growth options firms have to bear more risks and thus exhibit a higher idiosyncratic variance.…”

“…Indeed, RPE has become seemingly popular in practice. Recent studies show that roughly every fourth firm in the S&P 1500 openly claims to use RPE in their compensation contracts (Carter et al 2009;Gong et al 2011).…”