Discovery at Carlson·26 A Vested Interest 

A Vested Interest 

Grantined stock and options to top managers has become an ingrained corporate strategy for numerous companies to attract and retain top talent. But often, when such grants vest—that is, when the stock becomes eligible for selling or options become eligible for exercising—they can encourage what Carlson School Associate Professor of Accounting Vivian Fang calls “managerial myopia.” It’s a strategy that might keep a company’s short-term stock price high, but at the price of building long-term value.
That’s one of the key findings in a new paper Fang has co-written with Alex Edmans of the London Business School and Allen Huang of the Hong Kong University of Science and Technology. In their paper, which will appear in an upcoming issue of the Journal of Accounting Research, the authors examine the long-term effects of vesting equity.

How did vesting equity become such a major form of compensation? Fang points to a survey previously conducted by co-author Edmans, which shows that before the 1970s, pay was dominated by salaries and annual bonuses, with only moderate levels of equity. From the mid-1970s to the end of the 1990s, stock options became the largest component of CEO pay. And between 2001 and 2014, performance-based stock replaced options as the most popular form of equity compensation. Among its other attractions for businesses, equity compensation allows tech startups and other highgrowth, often cash-strapped firms to give employees a belowmarket salary with the promise of big rewards later.
These days, “for the typical CEO, the wealth changes caused by stock price movements are much larger than the corresponding changes in annual pay,” Fang says. 

The granting of stock and options are a strategy for aligning the interests of managers with those of shareholders. “One of the most fundamental principles of finance is that managers are supposed to represent shareholders when running the company,” Fang notes. “In other words, they are supposed to maximize firm value and shareholder returns by trading off short-term and long-term cash flows and making the optimal investments.”
However, she adds, “the problem is that some managers may put too much emphasis on short-term cash flows and forgo value-increasing long-term investments.”

For instance, R&D investments typically improve a firm’s cash flows and value in the long term. In the short term, they tend to depress earnings. If the firm doesn’t meet the market’s earnings expectations, the stock price is likely to fall, which is undesirable for the stock-owning manager. According to Fang, research has shown that managers are willing to cut R&D and other discretionary expenses to increase short-run earnings and boost (or at least sustain) their company’s stock price. But that comes at the expense of “the firm’s long-term value and competitive success.”

“The problem is that some managers may put too much emphasis on short-term cash flows and forgo value-increasing long-term investments.”
Fang certainly doesn’t believe that equity incentives shouldn’t be used. But they can be made to work better through the vesting process.“

One way to discourage myopic or opportunistic behavior that is potentially value-destructive is to lengthen the vesting period of equity beyond a CEO’s departure,” Fang says. This is what the UK’s Corporate Governance Code and the U.S. Council of Institutional Investors have been recommending in the past couple of years. “An alternative remedy would be to spread out the vesting of a large equity grant across different dates in a year, rather than it all vesting on the grant anniversary,” she adds. 
Such strategies can advance the long-term interests of all involved—the executives, the shareholders, and the company.

 

       向高管发放限制性股票和期权已经成为许多公司吸引和保留顶尖人才的固有策略。但是，卡尔森学院会计学副教授Vivian Fang表示，激励措施生效时——即，股票可销售、期权可行权时——往往伴随着“管理短视”。虽然这种策略能在短期内维持公司的股价高企，但会损害企业的长期价值。

       Fang与伦敦商学院的Alex Edmans、香港科技大学的Allen Huang共同撰写了一篇论文，研究高管股权的长期影响。该论文将发表在即将出版的《会计研究杂志》上，上述观点正是该论文的关键结论。

       股权如何成为了重要的薪酬形式？根据合著者Edmans执行的一项调研，在1970年代之前，工资和年终奖是薪酬的主要组成部分，股权占比较小。1970年代中期到1990年代末，股票期权在CEO薪酬包中的占比升至第一。2001年至2014年间，基于业绩的股票取代期权，成为最常见的股权薪酬形式。通过运用股权激励措施，初创企业和其他高增长、现金流短缺的企业可以承诺在未来提供丰厚报酬，从而以低于市场的工资吸引人才。

        Fang表示，“目前对于大部分CEO而言，股价变动引起的财富变化要比年薪变化大得多。”

        授予股票和期权，是为了使高管的利益与股东一致。Fang表示，“金融学的一个根本原则是，经理人应当在经营中代表股东。换言之，他们应该通过权衡短期和长期现金流、优化投资决策等方式，实现公司价值和股东回报的最大化。” 

         然而，她补充说，“一些经理人过于强调短期现金流，放弃了使公司增值的长期投资。”

        例如，研发投资能够改善企业的长期现金流和价值，但是会压低短期收益。如果公司的收益没有达到市场预期，股票价格可能下跌，这对于持股的经理人来说是不可取的。Fang的研究显示，经理人愿意削减研发和其他酌量费用，以期增加短期收益、提高（或至少维持）公司的股票价格。但这是以“公司的长期价值和成功”为代价的。

        当然，Fang并不主张废止股权激励，但可以通过优化行权流程使其发挥更大价值。

        Fang表示，“为了避免可能损害企业价值的短视行为和机会主义行为，一个方法是延长CEO的行权期限，使之延伸至离职后。”这也正是英国《公司治理准则》和美国机构投资者委员会近年来的推荐做法。她补充说：“另一个措施是，对于大额股权，在一年内设置多个行权日，分期行权。避免在一个行权日内全额行权。” 

         上述策略可以提高所有相关方的长期利益——高管、股东和公司。