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1、The Diffusion of Equity Incentive Plans in Italian Listed Companies1.INTRODUCTIONPast studies have brought to light the dissimilarities in the pay packages of managers in Anglo-Saxon countries as compared with other nations (e.g., Bebchuk, Fried and Walk er, 2002; Cheffins and Thomas, 2004; Zattoni,

2、 2007). In the UK and, above all in the US, remuneration encompasses a variety of components, and short and long term variable pay carries more weight than elsewhere (Conyon and Murphy, 2000). In other countries, however, fixed wages have always been the main ingredient in top managers5 pay schemes.

3、 Over time, variable short -term pay has become more substantial and the impact of fringe benefits has gradually grown. Notwithstanding, incentives linked to reaching medium to long-term company goals have never been widely used (Towers Perrin, 2000).In recent years, however, pay packages of manager

4、s have undergone an appreciable change as variable pay has increased considerably, even outside the US and the UK. In particular, managers in most countries have experienced an increase in the variable pay related to long-term goals. Within the context of this general trend toward medium and long-te

5、rm incentives, there is a pronounced tendency to adopt plans involving stocks or stock options (Towers Perrin, 2000; 2005). The drivers of the diffusion of long term incentive plans seem to be some recent changes in the institutional and market environment at the local and global levels. Particularl

6、y important triggers of the convergence toward the US pay paradigm are both market oriented drivers, such as the evolving share ownership patterns or the internationalization of the labor market, and law-oriented drivers, such as corporate or tax regulation (Cheffins and Thomas, 2004). Driven by the

7、se changes in the institutional and market environment, we observe a global trend toward the “Americanization of international pay practices,” characterized by high incentives and very lucrative compensation mechanisms (e.g., Cheffins, 2003; Cheffins and Thomas,.Ironically, the spread of the US pay

8、paradigm around the world happens when it is hotly debated at home. In particular, the critics are concerned with both the level of executive compensation packages and the use of equity incentive plan s (Cheffins and Thomas, 2004). Critics stressed that US top managers, and particularly the CEOs, re

9、ceive very lucrative compensation packages. The 80s and 90s saw an increasing disparity between CEOs pay and that of rank -and-file workers. Thanks to this e ffect, their direct compensation has become a hundred times that of an average employee (Hall and Liebman, 1998). The main determinants of the

10、 increasing level of CEOs and executives5 compensation are annual bonuses and, above all, stock option grants (Conyon and Murphy, 2000). Stock option plans have recently been criticized by scholars and public opinion because they characteristically are too generous and symptomatic of a managerial ex

11、traction of the firms value (Bebchuk et al., 2002; Bebchuk and Fried, 2006).In light of these recent events and of the increased tendency to adopt equity incentive plans, this paper aims at understanding the reasons behind the dissemination of stock option and stock granting plans outside the US and

12、 the UK. The choice to investigate this phenomenon in Italy relies on the following arguments. First, the large majority of previous studies analyze the evolution of executive compensation and equity incentive plans in the US and, to a smaller extent, in the UK. Second, ownership structure and gover

13、nance practices in continental European countries are substantially different from the ones in Anglo-Saxon countries. Third, continental European countries, and Italy in particular, almost ignored the use of these instruments until the end of the 90s.Our goal is to compare the explanatory power of t

14、hree competing views on the diffusion of equity incentive plans: 1) the optimal contracting view, which states that compensation packages are designed to minimize agency costs between managers and shareholders (Jensen and Murphy, 1990); 2) the rent extraction view, which states that powerful insider

15、s may influence the pay process for their own benefit (Bebchuk et al., 2002); and 3) the perceived-cost view (Hall and Murphy, 2003), which states that companies may favor some compensation schemes for their (supposed or real)cost advantages.To this purpose, we conducted an empirical study on the re

16、asons why Italian listed companies adopted equity incentive plans since the end of the 90s. To gain a deep understanding of the phenomenon, we collected data and information both on the evolution of the national institutional environment in the last decade and on the diffusion and the characteristic

17、s (i.e., technical aspects and objectives) of equity incentive plans adopted by Italian listed companies in 1999 and 2005. We used both logit models and difference-of-means statistical techniques to analyze data. Our results show that: 1) firm size, and not its ownership structure, is a determinant

18、of the adoption of these instruments; 2) these plans are not extensively used to extract company value, although a few cases suggest this possibility; and 3) plans characteristics are consistent with the ones defined by tax law to receive special fiscal treatment.Our findings contribute to the devel

19、opment of the literature on both the rationales behind the spreading of equity incentive schemes and the diffusion of new governance practices. They show, in fact, that equity incentive plans have been primarily adopted to take advantage of large tax benefits, and that in some occasions they may hav

20、e been used by controlling shareholders to extract company value at the expense of minority shareholders. In other words, our findings suggest that Italian listed companies adopted equity incentive plans to perform a subtle form of decoupling. On the one hand, they declared that plans were aimed to

21、align shareholders5 and managers5 interests and incentive value creation. On the other hand, thanks to the lack of transparency and previous knowledge about these instruments, companies used these mechanisms to take advantage of tax benefits and sometimes also to distribute a large amount of value t

22、o some powerful individuals. These results support a symbolic perspective on corporate governance, according to which the introduction of equity incentive plans please stakeholders for their implicit alignment of interests and incentive to value creation without implying a substantive improvement of

23、 governance practices.2.Corporate Governance in Italian Listed CompaniesItalian companies are traditionally controlled by a large blockholder (Zattoni, 1999). Banks and other financial institutions do not own large shareholdings and do not exert a significant influence on governance of large compani

24、es, at least as far as they are able to repay their financial debt (Bianchi, Bianco and Enriques, 2001). Institutional investors usually play a marginal role because of their limited shareholding, their strict connections with Italian banks, and a regulatory environment that does not offer incentive

25、s for their activism. Finally, the stock market is relatively small and undeveloped, and the market for corporate control is almost absent (Bianco, 2001). In short, the Italian governance system can be descr ibed as a system of “weak managers, strong blockholders, and unprotected minority shareholde

26、rs” (Melis, 2000: 354).The board of directors is traditionally one tier, but a shareholders5 general meeting must appoint also a board of statutory auditors as well whose main task is to monitor the directors5 performance (Melis, 2000). Further, some studies published in the 90s showed that the boar

27、d of directors was under the relevant influence of large blockholders. Both inside and outside directors were in fact related to controlling shareholders by family or business ties (Melis, 1999;2000; Molteni, 1997).Consistent with this picture, fixed wages have been the main ingredient of top manage

28、rs5 remuneration, and incentive schemes linked to reaching medium to long term company goals have never been widely used (Melis, 1999). Equity incentive schemes adopted by Italian companies issue stocks to all employees unconditionally for the purpose of improving the company atmosphere and stabiliz

29、ing the share value on the Stock Exchange. Only very few can be compared with stock option plans in the true sense of the term. Even in this case, however, directors and top managers were rarely evaluated through stock returns, because of the supposed limited ability of the Italian stock market to m

30、easure firms performance (Melis, 1999).3.The Evolution of Italian Institutional ContextThe institutional context in Italy has evolved radically in the last decade, creating the possibility for the dissemination of equity incentive plans. The main changes regarded the development of commercial law, t

31、he introduction and updating of the code of good governance, the issue of some reports encouraging the use of equity incentive plans, and the evolution of the tax law (Zattoni, 2006).Concerning the national law and regulations, some reforms in the commercial law (1998, 2003, and 2005) and the introd

32、uction (1999) and update (2002) of the national code of good governance contributed to the improvement of the corporate governance of listed companies (Zattoni, 2006). Financial markets and corporate law reforms improved the efficiency of the Stock Exchange and created an institutional environment m

33、ore favorable to institutional investors5 activism (Bianchi and Enriques,. At the same time the introduction and update of the code of good governance contributed to the improvement of governance practices at the board level. These reforms did not produce an immediate effect on governance practices

34、of Italian listed companies, although they contributed to improve, slowly and with some delay, their governance standards (Zattoni, 2006).Beyond the evolution of governance practices, some changes in the institutional environment directly affected the diffusion and the characteristics of equity ince

35、ntive plans. Both the white paper of the Ministry of the Industry and Foreign Commerce and the code of good governance issued by the national Stock Exchange invited companies to implement equity incentive plans in order to develop a value creation culture in Italian companies. Furthermore, in 1997 f

36、iscal regulations were enacted allowing a tax exemption on the shares received through an equity incentive plan. According to the new regulation, which took effect on January 1, 1998, issuance of new stocks to employees by an employer or another company belonging to the same group did not represent

37、compensation in kind for income tax purposes (Autuori 2001). In the following years, the evolution of tax rules reduced the generous benefits associated with the use of equity incentive plans, but also the new rules continued to favor the dissemination of these plans.Driven by these changes in the i

38、nstitutional context, equity incentive plans became widely diffused among Italian listed companies at the end of the 90s (Zattoni,. Ironically, the diffusion of these instruments in Italy and in other countries, such as Germany (Bernhardt, 1999), Spain (Alvarez Perez and Neira Fontela, 2005), and Ja

39、pan (Nagaoka, 2005) - took place when they were strongly debated in the US for their unpredicted consequences and the malpractices associated with their use (Bebchuk et al., 2002).4.The Rationales Explaining the Adoption of Equity Incentive PlansEquity incentive plans are a main component of executi

40、ve compensation in the US. Their use is mostly founded on the argument that they give managers an incentive to act in the shareholders5 interests by providing a direct link between their compensation and firm stock-price performance (Jensen and Murphy, 1990). Beyond that, equity incentive plans also

41、 have other positive features, as they may contribute to the attraction and retention of highly motivated employees, encourage beneficiaries to take risks, and reduce direct cash expenses for executive compensation (Hall and Murphy, 2003).Despite all their positive features, the use of equity incent

42、ive plans is increasingly debated in the US. In particular, critics question their presumed effectiveness in guaranteeing the alignment of executives and shareholders5 interests. They point out that these instruments may be adopted to fulfill other objectives, such as to extract value at shareholder

43、s expenses (e.g., Bebchuk and Fried, 2006), or even to achieve a (real or perceived) reduction in compensation costs (e.g., Murphy, 2002). In summary, the actual debate indicates that three different rationales may explain the dissemination and the specific features of equity incentive plans:1) the

44、optimal contracting view (Jensen and Murphy,1990 );2) the rent extraction view (Bebchuk et al., 2002); and 3)the perceived-cost view (Hall and Murphy, 2003).According to the optimal contracting view, executive compensation packages are designed to minimize agency costs between top managers (agents)

45、and shareholders (principals) (Jensen and Meckling, 1976). The boards of directors are effective governance mechanisms aimed at maximizing shareholder value and the top managements compensation scheme is designed to serve this objective (Fama and Jensen, 1983). Providing managers with equity incenti

46、ve plans may mitigate managerial self-interest by aligning the interests of managers and shareholders (Jensen and Meckling, 1976). Following the alignment rationale, equity incentives may improve firm performance, as managers are supposed to work for their own and shareholdersbenefit (Jensen and Mur

47、phy, 1990). In short, these instruments are designed to align the interests of managers with those of shareholders, and to motivate the former to pursue the creation of share value (Jensen and Murphy, 1990).4.1 the principle of equity incentiveManagers and shareholders is a delegate agency relations

48、hip managers operating in assets under management, shareholders entrusted. But in fact, in the agency relationship, the contract between the asymmetric information, shareholders and managers are not completely dependent on the managers moral self-discipline. The pursuit of the goals of shareholders

49、and managers is inconsistent. Shareholders want to maximize the equity value of its holdings of managers who want to maximize their own utility, so the moral hazard exists between the shareholders and managers, through incentive and restraint mechanisms to guide and limit the behavior of managers.In

50、 a different way of incentives, wages based on the managers qualification conditions and company, the target performance of a predetermined relatively stable in a certain period of time, a very close relationship with the companys target performance. Bonuses generally super-goal performance assessme

51、nt to determine the part of the revenue manager performance is closely related with the companys short-term performance, but with the companys long-term value of the relationship is not obvious, the manager for short-term financial indicators at the expense of the company long-term interests. But fr

52、om the point of view of shareholders investment, he was more concerned with long-term increase in the value of the company. Especially for growth-oriented companies, the value of the managers more to reflect the increase in the companys long-term value, rather than just short-term financial indicato

53、rs.In order to make the managers are concerned about the interests of shareholders need to make the pursuit of the interests of managers and shareholders as consistent as possible. In this regard, the equity incentive is a better solution. By making the manager holds an equity interest in a certain

54、period of time, to enjoy the value-added benefits of equity risk in a certain way, and to a certain extent, you can make managers more concerned about the long-term value of the company in the business process. Equity incentive incentive and restraint to prevent short-term behavior of the manager, t

55、o guide its long-term behavior.4.2 Equity Incentive modeThe performance of stockRefers to a more reasonable performance targets at the beginning of the year, if the incentive object to the end to achieve the desired goal, the company granted a certain number of shares or to extract a reward fund to

56、buy company stock. The flow of performance shares realized that usually have the time and number restrictions. Another performance of the stock in the operation and role relative to similar long-term incentive performance units and performance stock difference is that the performance shares granted

57、stock, performance units granted cash.stock optionsRefers to a company the right to grant incentive target incentive object can purchase a certain amount of the outstanding shares of the Company at a predetermined price within a specified period may be waived this right. The exercise of stock option

58、s have the time and limit the number of cash and the need to motivate the objects on their own expenditure for the exercise. Some of our listed companies in the application of virtual stock options are a combination of phantom stock and stock options, the Company granted incentive object is a virtua

59、l stock options, incentive objects rights, phantom stock.virtual stockThat the company awarded the incentive target a virtual stock incentive objects which enjoy a certain amount of the right to dividends and stock appreciation gains, but not ownership, without voting rights, can not be transferred

60、and sold, expire automatically when you leave the enterprise.stock appreciation rightsMeans the incentive target of a right granted to the companys share price rose, the incentive object can be obtained through the exercise with the corresponding number of stock appreciation gains, the incentive obj