ABSTRACT
Equity incentives are the measure of economic motivation created by the shares, stock options and restricted stock held by an executive. Equity incentives are an increasingly important feature of the contracting environment between shareholders (as represented by the board of directors) and executives. For example, Hall and Murphy (2002) report that, in 1998, the median values of stock and options held by Standard & Poor’s Industrial CEOs and Standard & Poor’s Financial CEOs were $30 million and $55 million, respectively. Similarly, Core et al. (2003) report that over the time period from 1993 to 1998, the average ratio of equity portfolio value to annual total pay was 30.3 for CEOs. Our goal in this chapter is to highlight some of the controversies surrounding equity incentives and to provide a synthesis of the academic research on these topics.
