Compensation Disclosures and Corporate Governance through Shareholder Voting

Abstract

There are several measures of equity compensation that may provide shareholders with distinct and useful information for evaluating CEO pay. We examine whether shareholders consider additional disclosures of equity compensation measures beyond the grant date fair value when participating in corporate governance. We find that CEO equity compensation expense, a distinct measure of equity compensation, is a determinant of shareholder voting for management sponsored equity plans and voting for directors that serve on the compensation committee. After controlling for ISS recommendations, we find that voting outcomes remain significantly related to abnormal equity compensation expense. Consistent with shareholders considering the equity compensation expense, we document that firms shorten equity compensation vesting periods when they are no longer required to disclose the equity compensation expense. Our findings suggest that shareholders rely on multiple, distinct measures of equity compensation when participating in corporate governance.

Management forecasts of volatility

“…10 Based on overlapping observations, expected volatility collected using our algorithm has a Pearson (Spearman) correlation of 0.92 (0.94) with the Compustat variable (optvol), which underscores the quality of our data. 11 Firms can disclose expected volatility used to calculate stock compensation expense in the annual report (10-K) or in the annual proxy statement (DEF 14A) (Cadman et al 2020). Disclosure in either the 10-K or the proxy statement may be incorporated by reference in the other filing.…”