The Diffusion of Equity Incentive Plans in Italian Listed Companies: What is the Trigger?

Abstract

Recent dynamics in the institutional and market environment have facilitated the propagation of equity incentive plans outside the US and the UK. This study sheds light on the reasons behind the diffusion of these plans in a country, Italy, where companies are usually controlled by a blockholder and where these instruments were almost absent until the end of the ‘90s.\ud To gain a deep understanding of the phenomenon, we collected data and information on both the diffusion and the technical aspects of equity incentive plans adopted by Italian listed companies in 1999 and 2005. The results show that (i) the determinant of their adoption is the firm size rather than the absence of a controlling shareholder; (ii) these plans are not extensively used to extract company value, although few cases suggest this possibility; and (iii) plans’ characteristics generally comply with the requirements in tax law so that fiscal benefits can be accessed. Our findings contribute to expand the traditional knowledge on reasons behind the adoption of equity incentive plans outside Anglo-Saxon countries, and support a symbolic perspective of corporate governance, according to which the introduction of new governance practices may not imply substantive governance reforms.\ud Practitioner/Policy implications: Our study recommends policymakers to improve the disclosure rules about these plans and to avoid the introduction of fiscal benefits that incentive the diffusion of some compensation schemes respect to others. Moreover, our results encourage members of remuneration committees to pay attention to the specific characteristics of the plans they design

Extract Or Not Extract? The Effect of Familism on Stock Option Plans

“…According to the agency theory, SOPs represent a governance mechanism aimed at aligning the conflicting interests of managers and dispersed heterogeneous owners towards the shareholder value maximization (Berle & Means, 1932;Jensen & Meckling, 1976;Jensen, Murphy, & Wruck, 2004).Within this framework, the design of an efficient compensation package also allows to attract, retain, and motivate CEOs, executives, and managers (Bruce, Buck, & Main, 2005;Zattoni & Minichilli, 2009). …”

“…Literature review reports that equity incentive plans are instruments that may be opportunistically used for extracting value from the company in concentrated ownership structure (Zattoni & Minichilli, 2009). Some studies shows that controlling shareholders of Italian listed companies extract a large amount of value at the expense of minority shareholders (Dyck & Zingales, 2004).…”

“…In the context of concentrated ownership, Zattoni and Minichilli (2009) aim at empirically tackling this issue. However, their findings do not support the hypothesis that family ownership impact on SOPs adoption.…”

“…Firstly, considering the inconclusive results of previous studies (e.g. Melis et al, 2012;Zattoni & Minichilli, 2009), we focus on family firms and show that SOPs are employed to mitigate conflicts between family and non-family owners, rather than merely to extract rents. Secondly, by employing cluster analysis we classify SOPs according to their characteristics rather than according to their official purposes (Melis et al, 2012).…”

Compensation Committee Quality and Effective Executive Remuneration

“…There are several components of the SOPs design that predict whether these instruments can be effective in aligning the interests of owners and managers (Bebchuk et al, 2002;Zattoni & Minichilli, 2009). The most relevant characteristics comprise the length of vesting, the lock-up period, the presence of indexed strike price, the strike price at/out the money and the practice of re-pricing (Johnson & Tian, 2000;Bebchuk et al, 2002;Zattoni, 2007).…”