Speaker: Tomislav Jadika, Amsterdam Business School
Title: "Do Firms Replenish Executives' Incentives After Equity Sales?"
Abstract: Boards grant executives equity to align their incentives with those of shareholders. Yet executive equity sales are common — 60 percent of executives sell ?rm equity during their tenure — and can cause an executive's holdings in the firm to become suboptimally low. I empirically examine whether boards restore a selling executive's incentives by shifting the composition of his subsequent pay toward more equity. Firm-level changes can cause executives to sell equity and simultaneously reduce their need for incentives. I account for such variables by comparing executives who sell equity to other top executives at the same firm who do not sell. I find that boards grant similar pay to selling and non-selling executives at the same firm, and replenish at most 10 percent of incentives lost due to a sale. This result is robust to a variety of reasons why the board may want a selling executive to own less equity, such as changes in the board's information about the executive or shocks to the executive's wealth. My paper suggests that boards do not maintain executives' incentives at an optimal level, as predicted by efficient contracting theory.