Executive stock option vesting conditions, corporate governance and CEO attributes: evidence from Australia

Abstract

We investigate the association between executive stock option (ESO) vesting conditions, corporate governance and CEO attributes. Using observations from the 250 largest Australian firms, we find that stronger corporate governance is positively associated with the length of the vesting period and the use of performance hurdles. We also find that when CEOs approach retirement, firms are more likely to grant longer time-vesting options but are less likely to impose performance hurdles. Further, more powerful CEOs appear to influence the granting of ESOs with less restrictive vesting conditions. Our findings suggest that both corporate governance and CEO attributes significantly shape the design of ESOs.

Perceptions of shareholders and directors on corporate governance: what we learn about director primacy

“…Two directly relate to the board itself: board size (Kiel and Nicholson, ; Ahmed et al ., ; Nguyen and Rahman, ; Gray and Nowland, ; Endrawes et al ., ) and board composition (Bozec et al ., ; Musteen et al ., ; Nelson et al ., ; Matolcsy et al ., ; Endrawes et al ., ). Three attributes relate to the board's sub‐committees: audit committee size (Xie et al ., ; Anderson et al ., ; Sultana et al ., ; Endrawes et al ., ), audit committee composition (Klein, ; Cotter and Silvester, ; Goodwin‐Stewart and Kent, ; Sultana et al ., ) and remuneration committee composition (Conyon and Peck, ; Nelson et al ., ; Ogden and Watson, ; Qu et al ., ). To capture independent monitoring associated with the firm's auditors, we include provision of non‐audit services (Frankel et al ., ; Larcker and Richardson, ) and audit partner tenure (Geiger and Raghunandan, ; Johnson et al ., ; Stewart et al ., ).…”

Motives of Stock Option Incentive Design, Ownership, and Inefficient Investment

“…First, we can classify them by their characteristics. Validity periods and performance hurdles are used to classify stock option incentives, and Qu Xin has applied this method to Australia listed companies [31]. However, in China, characteristics of stock option incentives show herd effects and just maintain the lowest requests from regulators.…”

Evidence of governance arbitrage by private equity sponsors

“…Qu et al . () found that firms with well‐structured remuneration committees, more independent directors on the board and separation of the roles of CEO and board chair are more likely to grant options with longer time‐vesting features and performance hurdles. Duong and Evans () investigate the extent to which the incentive alignment theory and the managerial power theory explain the variability of CFO compensation in Australia.…”