Another Consequence of SFAS 123R: Equity Compensation to Retirement Eligible CEOs

SFAS 123R, which mandates expensing the fair value of equity compensation over its vesting period, requires companies expense the entire fair value on the grant date when a retirement eligible employee is allowed to retain that compensation even if s/he retires prior to the end of that vesting period. From the firms' point of view, SFAS 123R makes equity compensation less attractive for executives approaching retirement. Consistent with this hypothesis, our results show that relative to younger executives, equity compensation decreases for executives approaching retirement post-SFAS 123R. We find evidence consistent with this decrease varying with the negotiating power of the employee, i.e., when we decompose our sample into CEO versus non-CEO named executive officer we only find a decrease for non-CEOs. We also find evidence consistent with firms differentially responding to this requirement, i.e., we find that new economy firms are less likely to reduce equity compensation.