Are Stock Options Grants to CEOs of Stagnant Firms Fair and Justified? |
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Authors: | Kiridaran Kanagaretnam Gerald J Lobo and Emad Mohammad |
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Institution: | (1) School of Administrative Studies, York University, 4700 Keele Street, Toronto, ON, M3J 1P3, Canada;(2) University of Saskatchewan, Saskatoon, SK, Canada;(3) Ryerson University, Toronto, ON, Canada;(4) Peking University, Beijing, China |
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Abstract: | Prior research has examined several ethical questions related to executive compensation. The issues that have received most
attention are whether executives’ pay is fair and justified by performance. Since more recent studies show that stock options
grants constitute the single largest component in executive compensation, we examine the relations of these grants to economic
determinants and corporate governance for firms in the stagnant stage of their lifecycle. We find that, on average, stock
options grants comprise a significant portion of annual CEO compensation (26.4%) for stagnant firms. We also find that economic
(corporate governance) factors explain less (or more) of the cross-sectional variation in stock options grants for stagnant
firms than for growth firms. Furthermore, we document lower pay-performance sensitivity (i.e., weaker incentive alignment)
and no improvement in future firm performance from past stock options grants to CEOs of stagnant firms. In particular, our
study provides empirical evidence on some inefficiencies associated with stock options grants to CEOs of low potential (stagnant)
firms, a long-standing concern of business ethics researchers (Moriarty, 2005; Nichols and Subramaniam, 2001; Perel, 2003). Our results also provide support for the corporate governance reforms discussed in Matsumura and Shin (2005), especially those proposed provisions that curtail the power of CEOs in the governance of firms. |
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