JultikaUniversity of Oulu repository

Abstract

The amount of compensation received by people plays an influential role in determining their commitment to work which in the long run affects performances of companies. There are different types of compensation systems and equity-based compensation is one of such which is supposed to help align the interest of agent and the principal. This study was conducted to analyse how broad-based equity compensation affects performances of selected listed firms in the U.S. On one hand, two proxies were used for firm performance measures: namely Return on Assets (ROA) and Tobin’s Q representing accounting and market-based performance measures respectively. On the other hand, fair value of stock options granted was used as proxy for broad-based equity compensation.

A total of 2064 firm year observations were used in conducting the analysis covering the period from 2011 to 2015. The results of the study supported one of the hypotheses while the other was not supported as far as the impact of stock options granted on firm performances is concerned. Fair value of stock options granted was found to have a positive impact on firms’ accounting performances measured by ROA but was found to have a negative impact on market-based performance measured by Tobin’s Q. The results of this study concur with several other studies and also confirmed that,other firm characteristics such as firm size, leverage, liquidity, growth opportunities and firm age can equally affect performances of firms.

The results of this study have relevant implications for management, shareholders, employees and all interested parties in corporate governance. The results will help all these stakeholders in making informed decisions when approving the adoption of broad-based equity compensation plans for listed companies.