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Countermove: how CEOs respond to post-acquisition compensation adjustments

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Abstract

Following poorly performing acquisitions, the board of directors often redesigns the CEO’s annual compensation package to include less risk-encouraging stock options and more risk-discouraging restricted stock. This study explores the emerging area of post-acquisition compensation management and proposes that CEOs can indirectly, but effectively, defend against compensation rebalancing. Specifically, we find that CEOs may counteract the effects of compensation rebalancing by delaying the exercise of existing stock option holdings. Fortunately, this insight also offers valuable implications including the ability of the board to limit the CEO’s defense by adjusting stock option exercise windows.

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Notes

  1. It is worth noting that boards replace stock options with restricted stock in annual compensation grants, yet the risk effects of stock and stock options are based on overall holdings. Spraggon and Bodolica (2011) argue that the shift in annual compensation ultimately influences overall stock and option holdings, thereby contributing to the behavioral incentive and disincentive effects concerning future acquisitions.

  2. A fourth approach to dealing with rebalanced compensation is for the CEO to leave the firm for another firm and renegotiate with a new board of directors. While an interesting avenue for additional research, this study limits itself to exploring how the CEO can respond to his or her existing board of directors to undermine the board’s efforts to rebalance CEO compensation.

  3. There may also be salient political and symbolic implications for refraining from exercising stock options. These considerations are discussed in the following sections.

  4. It is not theoretically clear exactly how many additional stock options are needed to offset additional restricted stock. However, it is theoretically tenable that more shares of stock will result in greater risk-discouraging effects, and additional options would be necessary to create a greater risk-encouraging incentive.

  5. Each observation may not be complete. The procedure for handling incomplete observations is described at the end of the description of the variables.

  6. Defined according to 4-digit SIC codes.

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Authors and Affiliations

  1. College of Business, University of Mary Washington, 1301 College Avenue, Fredericksburg, VA, 22401, USA

    John S. Marsh

  2. School of Business, University at Albany, SUNY, 1400 Washington Avenue, Albany, NY, 12222, USA

    William J. Wales

  3. Department of Management, James Madison University, 800 S. Main Street, Harrisonburg, VA, 22801, USA

    Fariss-Terry Mousa

  4. Smeal College of Business, The Pennsylvania State University, 210 Business Building, University Park, PA, 16802, USA

    Rachel Graefe-Anderson

Authors
  1. John S. Marsh
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  2. William J. Wales
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  3. Fariss-Terry Mousa
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  4. Rachel Graefe-Anderson
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Corresponding author

Correspondence to John S. Marsh.

Appendix

Appendix

See Tables 8, 9, 10, 11, 12, 13 and 14.

Table 8 Variance inflation factors for independent variables
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Table 9 Results of linear regression of percent change in CEO stock option exercise 80 % subsample
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Table 10 Results of Heckman linear regression of percent change in CEO stock option exercise 80 % subsample
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Table 11 Results of probit regression of if CEO exercises stock options 80 % subsample
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Table 12 Results of Heckman probit regression of if CEO exercises stock options 80 % subsample
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Table 13 Results of linear regression of percent change in CEO stock option holdings 80 % subsample
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Table 14 Results of Heckman linear regression of percent change in CEO stock option holdings 80 % subsample
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Marsh, J.S., Wales, W.J., Mousa, FT. et al. Countermove: how CEOs respond to post-acquisition compensation adjustments. Rev Manag Sci 10, 711–755 (2016). https://doi.org/10.1007/s11846-015-0174-8

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