Explicit relative performance evaluation in performance-vested equity grants

Explicit relative performance evaluation in performance-vested equity grants 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. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Review of Accounting Studies Springer Journals

Explicit relative performance evaluation in performance-vested equity grants

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Publisher
Springer US
Copyright
Copyright © 2009 by Springer Science+Business Media, LLC
Subject
Business and Management; Accounting/Auditing; Corporate Finance; Public Finance
ISSN
1380-6653
eISSN
1573-7136
D.O.I.
10.1007/s11142-009-9085-8
Publisher site
See Article on Publisher Site

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.

Journal

Review of Accounting StudiesSpringer Journals

Published: Feb 6, 2009

References

  • Relative valuation roles of equity book value and net income as a function of financial health
    Barth, M; Beaver, W; Landsman, W
  • Discussion of the pricing of relative performance based incentives for executive compensation
    Brennan, M
  • Executive stock options: Early exercise provisions and risk-taking incentives
    Brisley, N
  • Discretion in financial reporting: The voluntary disclosure of compensation peer groups in proxy statement performance graphs
    Byrd, J; Johnson, M; Porter, S
  • The prince and the pauper? CEO pay in the United States and United Kingdom
    Conyon, M; Murphy, K

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