Benchmarking, Incentive Rebalancing, and the Influence of Labor Market Competition on CEO Equity Grants

• In Event: CEO Reputation and Pay

Abstract

Prior research provides evidence that firms grant equity to rebalance the portfolio of equity incentives. In recently mandated disclosures, firms often state that they grant equity to meet labor market forces. We examine this benchmarking motivation and the effect it may have on portfolio rebalancing. We predict and find that CEO equity grants are positively related to peer firm equity grants and that rebalancing remains a determinant, after controlling for benchmarking. In cross-sectional tests, we find no difference in the weight placed on benchmarking regardless of the degree of labor market competition but we find that firms in more competitive labor markets are more likely to target equity grant levels of their compensation peers. We further find that when CEO incentive levels deviate more from desired levels, equity grants are less likely to match the levels of peer firms, suggesting that rebalancing portfolio incentives supersedes benchmarking to labor markets when the two objectives may conflict. Finally, we find that benchmarking is symmetrically related to both increases and decreases in peer grants, which suggest that firms do not opportunistically benchmark equity grants to enrich CEOs. Our findings contribute to understanding the role of labor market pressure on CEO annual equity grants.

Authors

• Brian D Cadman, University of Utah

• Mary Ellen Carter, Boston College

• Xiaoxia Peng, University of Utah