Abstract
This study examines how a Securities and Exchange Commission rule change affected the design of executive compensation contracts. It shows that a change in insider holding requirements for employee stock options led to a widespread decrease in the use of stock appreciation rights. Further, we find firms that decrease their use of stock appreciation rights compensate employees by increasing their use of employee stock options.
The Securities and Exchange Commission rule change provides a unique opportunity to examine the use of compensation methods as it caused firms to examine their policies and make an active decision to modify their practices. Cross-sectionally, we find the likelihood a firm decreases its use of stock appreciation rights positively associated with the magnitude of expense associated with stock appreciation rights, the firm's use of income-increasing accounting methods, leverage, and the ratio of market to book value of assets. We also find a significant interaction effect for the magnitude of expense when interacted with profitability.
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