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. We show that these features of firms’ option plans directly impact management turnover, early exercise of stock options, and the availability of data about early exercises. For CEOs over age 60, companies’ sunset rules generally 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 Georgetown University, Mannheim University, University of St.Gallen, University of Tennessee, and the Gerzensee European Summer Symposium in Financial Markets.