Multi-Metric Vesting Schemes in Executive Performance: Equity Grants

Abstract

Using a large sample of executive performance equity grants over 2006–2019, we provide a comprehensive representation of the single- and multi-metric vesting schemes used by U.S. public firms and investigate the incentives provided by alternative functional forms of vesting formulas that combine earnings with stock returns and other nonearnings targets. Our results indicate that, compared to earnings-vesting single- and multi-metric summative grants, binding schemes that require the contemporaneous achievement of both earnings and nonearnings targets for grant vesting limit executive fixation on earnings and the associated incentives to maximize grant payouts by managing earnings around the targets. The findings confirm the expectation of different incentive effects from alternative (linear versus nonlinear) aggregations of multiple performance targets in the grant vesting formulas, with binding schemes being more effective in mitigating the risk of executives prioritizing earnings relative to other targets in multi-metric grants.