Stock-based compensation plan: an analysis of the determinants of its use

Abstract

This study’s aim was to investigate the main aspects that determined the use of the stock-based compensation model and the variables that influence the amount paid. The article fills the gap in the previous debate regarding the variables that affect the decision to offer stock-based remuneration, as well as revealing the factors that impact its magnitude and providing a more robust statistical treatment with regards to endogeny. Brazil is known to be a country where the agency conflict between controlling and minority shareholders predominates, and so it is important to understand the determinants of adoption and of the amount paid to managers using stock options, since remuneration can be used as a form of tunneling. This study identified a possible trade-off between cash and stock compensation, in view of increased company indebtedness. It also found that in the Brazilian market this type of remuneration is not related to governance and performance. A panel data regression was used with fixed effects in the firm and industry*year to eliminate the possible bias arising from constant heterogeneities in time for the firms and shocks in the industries in a particular year. In addition, to identify the determinants, we used a logistic regression with panel data and fixed effect in industry*year. The study sample comprised 287 companies listed on the Bolsa, Brasil, Balcão (B3) exchange. This research shows that 40% of the companies in the period from 2010 to 2016 adopted stock-based compensation plans; however, the amount paid is still low, at 0.03% of total company assets. The results indicate that in the Brazilian market variables such as investment opportunities and company size increase the likelihood of adopting the employee stock options plan (ESOP). In addition, regarding the amount paid, this is negatively related to company leverage, indicating that in possible liquidity shocks the companies opt to compensate managers with shares to reduce their exposure to systematic risks.