Equity Incentive Plans and Board of Director Discretion over Equity Grants

Abstract

Equity compensation is granted out of an equity incentive plan that must be approved by shareholders and cedes discretion over equity grants to boards of directors. We predict and find that equity plan proposals give boards more discretion over grants when the firm faces greater labor market forces and more volatile stock returns. When examining votes, we find that shareholders are less likely to support plans with abnormal discretion. We also find that boards with more discretion grant more equity in response to stock price declines. Lastly, we find that boards request additional shares when their ability to grant equity is more constrained by a smaller pool of available shares, and when they plan to increase equity grants. Overall our findings illuminate how firms balance needs to respond to labor market pressure and volatile operating environments against shareholder governance and oversight of equity compensation.