The Determinants of Shareholder Voting on Stock Option Plans

Abstract

Over the past decade, executive compensation has become a controversial topic. Increasingly, corporate boards of directors are confronted by angry shareholder groups over the size and composition of executive pay packages. One of the most important focal points for these tensions arises when shareholders are asked by the board to approve the creation of new stock option plans, or the amendment of existing plans. This article seeks to identify the factors that lead shareholders to support or oppose stock option plans. We examine the justifications for the widespread use of stock options and identify several benefits from stock option plans as well as some of the criticisms leveled against the methods that boards have used to implement the plans.

In addition, we conduct an empirical analysis of the determinants of shareholder voting on stock option plans in the 1998 proxy season. We examine the four companies in our sample in which shareholders defeated the plans and then perform a cross-sectional analysis of voting results on the entire sample of 637 proposals. Our principal finding is that while shareholders generally vote to approve stock option plans, shareholders are particularly sensitive to the potential dilution caused by the plans, whether that dilution is in terms of total company dilution or individual plan dilution. In addition, we find that several characteristics of the plans, such as option repricing, payments in restricted stock, and the provision of loans to executives for the purchase of shares appear to be the most significant factors leading to increased shareholder opposition.