Does Equity-Based Compensation Increase Managers' Ownership?

Abstract

We find that executives sell shares of previously owned stock after receiving equity-based incentive compensation, counteracting boards' attempts to tie their wealth to firm value. Executives sell stock during years in which they receive new stock options or restricted stock, and some evidence indicates further selling over time if options move into-the-money. When options are exercised, managers sell a large majority of shares acquired. Effects are strongest for executives who already hold many shares, while stock-based compensation does appear to increase the holdings of managers with low ownership. Although valuation theorists who study executive compensation frequently assume that executives cannot hedge the risks of stock-based pay, our research provides evidence to the contrary.