Executive Equity Compensation Plans and Board of Director Discretion over Equity Grants

Executive equity compensation is granted out of an equity incentive plan that must be approved by shareholders. Equity incentive plans are an important precursor to equity grants because plan terms give boards of directors discretion over the amount and features of equity that can be granted without further shareholder approval. We predict and find that equity plan proposals give boards more discretion over grants when the firm faces greater labor market competition and more volatile stock returns and when shareholders have less influence over the board. Shareholders vote less favorably for plans that confer greater discretion to boards but that relation weakens with labor market competition and shareholder influence. We also find evidence of more discretion facilitating larger equity grants in response to stock price declines. Overall our findings provide insights into the determinants of equity compensation plan characteristics that affect board discretion over equity grants and illuminates how firms balance needs to respond to labor market pressure and volatile operating environments against the governance and oversight of executive equity compensation.