Hybrid Equity: A New Approach to Equity Compensation
14 Pages Posted: 27 Apr 2009 Last revised: 14 May 2009
Date Written: April 26, 2009
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 Classification: G34, J33, M52
Suggested Citation: Suggested Citation