Disappearing Stock Options: The Evolution of Equity Pay

Executive compensation has skyrocketed over the last thirty years, largely due to an increased use of equity pay. Corporations were able to generously compensate their top executives, and, at least in the short term, link executive pay to firm performance. Thanks to modifications to the tax code and accounting rules in 1993, public companies favored the grant of options over stock. Yet this produced perverse incentives, including excessive risk-taking and a heightened focus on short-term stock performance, which many commentators and policy-makers believed culminated in the 2008 financial crisis. In response, public resentment swelled, spurring academic debates, congressional hearings, and statutory changes. This trend shifted in the past decade as companies now impel conservative behavior through executive compensation. This Note presents the first comprehensive study of the change in the equity composition of executive compensation after the financial crisis. For the first time, stock grants overtook options as the dominant form of equity pay. The evidence shows that the movement away from stock options is largely a response to the panoply of federal efforts to control ‘excessive’ executive compensation and mitigate risk. This finding has important implications for regulators and shareholders alike who wish to offset managerial influence over executive pay at public companies