Research: Hybrid Equity: A New Approach to Equity Compensation

Marc Hodak
Hodak Value Advisors; New York University - Markets, Ethics & Law (MEL) Program



http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1395524


Journal of Applied Corporate Finance, Forthcoming

Abstract:
    



Equity compensation can provide some of the consideration needed to
attract and retain talent while greatly contributing to the ongoing
alignment of management and shareholder interests. Until now, managers
and boards have utilized what one might call borrowed instruments, such
as common stock or standard options (granted at-the-money), i.e.,
instruments they saw being utilized in other contexts when they began
rewarding their managers with equity. Boards have layered various
restrictions on these instruments to improve retention or alignment, or
mixed and matched them according to taste or fashion. Unfortunately,
each of these instruments poses certain well-understood limitations.

We
can overcome these limitations with an equity instrument designed
specifically for executive compensation. After satisfying certain
accounting and tax constraints, this instrument could function as an
in-the-money, indexed option, capable of being tailored to the
particular needs of any corporation. Since this single instrument would
meet all the equity-based compensation objectives for a given company,
it could also greatly simplify the firm's compensations plans, while
enabling it to more optimally balance its governance requirements of
retention, alignment, and cost control.

Keywords: Executive compensation, corporate governance, stock options, management incentives

JEL Classifications: G34, J33, M52