Demand for general human capital is rising across the economy, which makes it important to understand how firms can retain highly talented managers. One key retention mechanism is to defer parts of managers’ compensation into the future, by granting equity that does not vest for several years. Managers who voluntarily depart their firms typically forfeit unvested equity, which raises their cost of pursuing an outside option.
In our article, The Retention Effects of Unvested Equity: Evidence from Accelerated Option Vesting, forthcoming in the Review of Financial Studies and publicly available on SSRN, we present novel evidence on the retention incentives of deferred compensation. We study how executive turnover changes following the sudden elimination of stock option vesting restrictions by means of a major regulatory change in the U.S., and document three findings. First, voluntary CEO turnover rises significantly when the amount of options forfeited upon leaving decreases. Second, these departures precipitate declines in firm value. Third, firms respond to turnover by raising the pay of remaining executives and newly hired CEOs, implying that departures allow firms to update their beliefs about executives’ outside options.
