The Participation Constraint and CEO Equity Grants

We examine whether firms benchmark annual equity grants to compensation peers and whether meeting the participation constraint is a motive. Studying CEO equity grants over the period of 2006–2016 and compensation peers disclosed by the firm, we find that equity grants by these peers significantly determine a firm's equity grants. We find no evidence that the relation between a firm's and its peers' CEO equity grants is an indirect outcome of meeting peer total compensation levels. In contrast, we show that firms are more likely to meet peer equity grant levels when the labor market is more competitive and when losing key personnel is a risk factor. We also find that CEO turnover is more likely when the CEO receives lower equity grants than peers. Collectively, these findings are consistent with the theoretical prediction that benchmarking equity grants helps firms satisfy the participation constraint, which varies with performance. Data Availability: Data are available from sources cited in the text. JEL Classifications: G34; J33; J40; M12; M52.