The impact of SFAS 123R on CEO equity compensation

A Work Project, presented as part of the requirements for the Award of a Masters Degree in Finance from the NOVA – School of Business and Economics

In December of 2004, FASB released SFAS 123R, mandating the expensing of executive stock options. This paper studies the changes that occurred in CEO equity compensation in the period of 2000 to 2006. Complementary, I analyze the relevance of performance conditions in this form of compensation. There are two main findings: (i) in the post-SFAS 123R period executive stock options determinants become different (ii) the use of performance equity grants contributes to the decrease of traditional stock options, since the use of these type of grants has a statistically impact in the decrease of traditional stock options grants between 2006 and 2003. There are also two side-results: (i) before SFAS 123R stock options drivers were explaining CEO total compensation, in the post-rule period total compensation drivers became less similar to stock options ones (ii) there is a significant difference between stock options and restricted stock drivers, that persist even after SFAS 123R be introduced.