Economic Determinants of Increased Use of Performance-Vesting Provisions in CEO Incentives

Abstract

This study examines the determinants of firms adopting performance-vesting long-term incentive (PLI) awards, a rapidly growing form of executive compensation. Using data provided by Equilar on Russell 3000 firms, I investigate how a firm's contracting environment and inter-firm networks influence the adoption and design of PLI awards. I find that stock liquidity and analyst coverage significantly increase the likelihood of adoption by enhancing the informativeness of performance measures. The findings suggest that firms adopt PLI awards to better align managerial incentives with shareholder interests, focusing on the measures that are both reliable and strategically aligned. I also show that board interlocks, particularly those involving compensation committee members, and shared compensation consultants play a significant role in facilitating the diffusion of PLI awards across firms.