You Can't Take It With You: Sunset Provisions for Equity Compensation When Managers Retire, Resign, or Die

Abstract

Company stock option plans have diverse “sunset” policies for modifying terms of options held by managers who exit the firm. In our S&P 500 sample, these forfeiture, vesting, and expiration provisions are less generous in companies characterized by fast growth, dependence on skilled human capital, and high strategic interaction with competitors. While these results apply for workers who retire at the end of their careers, almost no variation exists in the treatment of workers who resign with the possibility of working elsewhere. We show that these features of firms’ option plans directly impact management turnover. For CEOs over age 60, companies’ sunset rules imply large discounts to option award values and estimates of total compensation. The authors appreciate helpful comments from Manuel Ammann, Patrick Bolton, Jennifer Carpenter, Don Chance, Stephen Choi, John Core, Joan Heminway, Tracie Woidtke, and seminar participants at Chinese University Hong Kong, Fordham University, Georgetown University, Mannheim University, University of St. Gallen, University of Tennessee, and the Gerzensee European Summer Symposium in Financial Markets.