Executive remuneration in blockholder-dominated firms. How do Italian firms use stock options?

Abstract

The aim of this study is to explore how stock options are used for executive remuneration in blockholder-dominated listed firms. By analysing how stock options granted to executive directors were designed, this paper sheds light on how stock options are used in Italian blockholder-dominated listed firms. Empirical evidence from a unique hand-collected dataset comprising stock options granted by Italian non-financial listed firms between 2004 and 2006 suggests that stock option design seems to be better explained by rent-extraction theory than by optimal contracting theory. Our results suggest that board independence, particularly in terms of minority shareholders’ representation, seems to have a positive influence on stock option design. These findings are consistent with rent-extraction theory:\ud stock option designs that are not explained by optimal-contracting theory are likely to reflect governance/agency problems. This study provides insights on executive remuneration to policy-makers. It is recommended that codes of best practice should stress the importance of stock option design and of remuneration committees’ independence, in particular in terms of minority shareholders’ representation.\ud Last but not least, this study points out the importance of enforcing substantial compliance with the codes’ recommendations

Compensation Committee Quality and Effective Executive Remuneration

“…With the aim of preventing this expropriation, minority shareholders hold the right to appoint at least one compensation committee director to their own slate. In line with this prediction, empirical studies reveal that when remuneration committees are composed of at least an independent director appointed by minority shareholders, executive remunerations are more effective in aligning the objectives of managers and shareholders (Melis et al, 2012).…”

“…Directors having no personal and/or contractual relationship with the firm are expected to act in the interests of outside shareholders when defining an effective executive remuneration. In these respect, scholars highlight that independent non-executive directors hold the responsibility to enhance shareholder protection in order to maintain their reputations (Fama & Jensen, 1983a) For instance, Melis, Carta, and Gaia (2012) show that boards with a higher proportion of independent directors are more likely to design executive remuneration aimed at alleviating agency conflicts between managers and shareholders. Similarly, Li, Moshirian, Nguyen, and Tan (2007) suggest a positive relation between board independence and CEO compensation in Chinese firms.…”

“…Among the executive compensation practices, SOPs are one of the most controversial governance remuneration tools (Core, Guay, & Larker, 2003;Jensen & Zajac, 2004;Melis et al, 2012). According to the agency theory, compensation committee has the chance to reward executives with equity options, as the variable amount of the total remuneration, with the aim to align their interests to those of outside shareholders (Jensen & Meckling, 1976;Fama & Jensen, 1983a;Jensen & Murphy, 1990).…”

Corporate governance and company performance across Sub-Saharan African countries

“…The members of this committee should not have any personal financial interest in the remuneration decisions they are taking (Greenbury, 1995), and should help the board to set compensation in such a way that it motivates the executives, while taking the interests of the shareholders into account. In other words, the remuneration committee needs to ensure that executives are compensated fairly and responsibly (Melis et al, 2012, South Africa IOD, 2009). …”

Remuneration Committee governance and firm performance in UK financial firms

“…The Turner Review (2009) recommends that the structure of remuneration in many banks should be looked at in order not to create any incentives for inappropriate risk-taking. The Combined Code (2008) and OECD Principles of Corporate Governance (2004) recommended a long-term remuneration contract for directors because it will give the principal enough time to observe the longterm outcomes of any financial activities in the company (Melis et al, 2012).…”