Stock-based Compensation and Shareholder Value

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INOM

EXAMENSARBETE INDUSTRIELL EKONOMI, AVANCERAD NIVÅ, 30 HP

STOCKHOLM SVERIGE 2017,

Stock-based Compensation and Shareholder Value

ERIK FORSBLOM

LUDWIG SMEDBERG

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Stock-based Compensation and Shareholder Value

Erik Forsblom Ludwig Smedberg

Master of Science Thesis INDEK 2017:98 KTH Industrial Engineering and Management

Industrial Management

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Aktiebaserad ersättning och aktieägarvärde

Erik Forsblom Ludwig Smedberg

Examensarbete INDEK 2017:98 KTH Industriell teknik och management

Industriell ekonomi och organisation

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Master of Science Thesis INDEK 2017:98

Stock-based Compensation and Shareholder Value

Erik Forsblom Ludwig Smedberg

Approved

2017-06-01

Examiner

Terrence Brown

Supervisor

Tomas Sörensson

Commissioner

Handelsbanken Fonder AB

Contact person

Magdalena W. Alveskog

Abstract

Stock-based compensation programs are used as a method to incentivize increased executive performance. From a shareholder perspective, the desired outcome of stock-based compensation programs is that they deliver more value than they cost, which would translate into a higher shareholder return. It is therefore of interest to investigate whether companies which use stock- based compensation deliver higher shareholder return than companies that do not use stock- based compensation.

One significant benefit of stock-based compensation is that it encourages equity ownership among company executives. This should provide stronger incentives for those executives to perform well, because the value of their own assets depend on their performance to a greater extent than if they did not own equity in the company. Furthermore, the programs may be impacted by factors such as taxation of stock-based compensation, the sector it is used in, and various other stock-based compensation program properties.

This study investigates companies in the Small Cap and Mid Cap sections of Nasdaq Stockholm over a five-year period, looking specifically at industrial companies and service companies. The results of the study show that there is a statistically significant difference in favor of the returns of industrial companies with stock-based compensation programs compared to the returns of industrial companies without stock-based compensation programs. Specifically, the use of warrants in stock-based compensation programs are highly associated with higher shareholder return.

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Examensarbete INDEK 2017:98

Aktiebaserad ersättning och aktieägarvärde

Erik Forsblom Ludwig Smedberg

Godkänt

2017-06-01

Examinator

Terrence Brown

Handledare

Tomas Sörensson

Uppdragsgivare

Handelsbanken Fonder AB

Kontaktperson

Magdalena W. Alveskog

Sammanfattning

Aktiebaserade ersättningsprogram används som en metod för att ge incitament att höja ledningspersoners prestation. Från ett aktieägarperspektiv är det önskade utfallet av aktiebaserade ersättningar att de levererar högre värde än de kostar, vilket då skulle leda till högre avkastning till aktieägare. Det är därför av intresse att undersöka huruvida företag som använder aktiebaserade ersättningar faktiskt levererar högre avkastning än företag som inte använder aktiebaserade ersättningar.

En viktig fördel med aktiebaserad ersättning är att det främjar till aktieägarskap för bolagets ledningspersoner. Detta borde skapa starkare incitament för de ledningspersonerna att prestera bra, eftersom värdet på deras tillgångar i större utsträckning beror på deras egen prestation jämfört med om de inte ägde aktier i bolaget. Vidare påverkas programmen av faktorer så som beskattning av aktiebaserad ersättning, vilken bransch det används i, och diverse andra egenskaper hos aktiebaserade ersättningsprogram.

Denna studie undersöker bolag i Small Cap och Mid Cap listorna på Nasdaq Stockholm över en femårsperiod, med ett specifikt fokus på industribolag och tjänstebolag. Studiens resultat visar att det finns en statistiskt signifikant skillnad till fördel för avkastningen från industribolag som använder sig av aktiebaserade ersättningsprogram jämfört med avkastningen från industribolag som inte använder aktiebaserad ersättningsprogram. Specifikt är användandet av teckningsoptioner i aktiebaserade ersättningsprogram starkt associerat med högre avkastning till aktieägare.

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Acknowledgements

We would like to extend our warm thanks to our thesis supervisor at the department of Industrial Management and Engineering at KTH, Tomas Sörensson, Associate Professor. We have been very lucky to have access to Tomas’ extensive knowledge of the finance industry in general and of stock-based compensation programs in particular.

We would also like to thank Magdalena Wahlqvist Alveskog at Handelsbanken Fonder AB for her involvement and opinions as an independent commissioner from the private sector.

Erik Forsblom and Ludwig Smedberg Stockholm, 2017-05-24

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Introduction

This chapter introduces the concept of stock-based compensation programs and their history, as well as provides the purpose and research questions upon which the rest of this thesis is based.

1.1 Background

Executive compensation continues to engage and outrage the public, the media and academics. The subject of executive compensation began generating significant research interest during the 1990’s, as executive stock options became a more common method to incentivize CEOs and managers. Indeed, the number of published academic papers on CEO pay grew even more than executive compensation itself during this period (Murphy, 1998). Some results from previous research includes a demonstrated positive relationship between executive equity ownership and firm performance (Mehran, 1995), a statistically significant positive relationship between Tobin’s q¹and both CEO compensation and executive share ownership (Elayan et al., 2003), as well as higher sensitivity of CEO wealth to stock volatility leading to riskier company policies (Coles et al., 2004).

Public corporations typically set up stock-based compensation programs for executive management to incentivize them to perform better. The purpose of such programs is to align executive and shareholder interests such that the overriding goal is to maximize equity value in the long-term. Stock-based compensation programs may come in many different forms and combinations, such as stock options, warrants, savings shares² and performance shares³, and may be based on performance indicators tied to shareholder return, operational targets, innovation or financial targets. The

1Tobin’s q is defined as the ratio of the market value of a company’s assets (stock and debt) divided by the replacement cost (book value) of those assets (Miles et al., 2012). The higher Tobin’s q, the more value a company is able to generate out of their assets.

2Savings shares: for every purchased share of stock in the company, the agent obtains the right to receive another or multiple shares for free or at a discount.

3Performance shares: shares of stock in the company are awarded, given that one or more performance targets are achieved.

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CHAPTER 1. INTRODUCTION

general idea is that the greater risk exposure to the firm’s equity that an executive has, the stronger the incentive will be to manage the company in a direction that will generate high long-term returns to shareholders (Murphy, 2012).

Among public Swedish companies, 55% of Large Cap firms, 35% of Mid Cap firms and 25% of Small Cap firms had stock-based compensation programs during 2015 (Lidén et al., 2016). Lidén et al further finds that among the new programs adopted during 2015, the three most common types, making up 82% of all new programs, include warrants, savings shares and performance shares. The most common performance indicators among these companies were total return to shareholders (TRS), EPS, EBIT and revenue. The by far most common time horizon was 3 years, which was the case in roughly 75% of stock-based compensation programs. All other time horizon periods occurred with less than 10% frequency.

One significant challenge regarding stock-based compensation is tying the payout of the program to actual performance, rather than general market or industry trends.

During bull market conditions, stock-based compensation may reward everyone, in- cluding poor performing managers. During economic downturns on the other hand, the best performing managers may receive no payout as a result of the general market conditions, even if they outperform everyone in their sector. For a compensation program to provide strong incentives to the involved executives, those executives must perceive that the incentives are tied to performance targets over which they have some control. Furthermore, it may be desirable that stock-based compensation programs not only reward executives for outstanding performance, but also provide downside risk. In such a scenario, affected executives would face both upside and downside risk, and perceive that they have sufficient control over the involved performance targets.

The need for executive incentives may also vary among sectors. For instance, industrial companies rely heavily on capital investment such as equipment, machinery, plants and factories, while service sector companies rely much more on their human resources. For this reason, executives in industrial companies may potentially have a larger degree of power in terms of deciding upon new investments and projects compared to those of service companies, where employees themselves to a greater extent constitute the main firm assets with their individual performances. This study focuses on industrial companies, but investigates and compares with companies in the service sector to highlight the characteristics of industrial companies. The study also specifically focuses on the Swedish market, as there is a lack of previous research regarding this market. Furthermore the use of stock-based compensation programs is also fairly common in Sweden.

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1.2 Problem Formulation

Stock-based compensation intends to provide executives with incentives to deliver high performance, whether it be through stock options, warrants or other share awarding programs. However, what provides strong incentives may vary with sector, achievability, total potential compensation, company performance targets, current equity ownership and many other factors. The problem is therefore, given company circumstances, to choose incentive programs that entail a positive future impact on shareholder value.

1.3 Research Purpose

The purpose is to investigate the relationship between stock-based compensation programs and total shareholder return by first mapping current stock-based compensation programs in public Swedish companies of small to medium size across two different sectors.

1.4 Research Questions

Research Question 1: What stock-based compensation programs currently exist in industrial and service companies respectively, and how well do these programs align with existing guidelines and research, for firms listed on Small Cap and Mid Cap on Nasdaq Stockholm?

Research Question 2: What types of stock-based compensation programs and what configuration of them are associated with the highest total return to shareholders, for firms listed on Small Cap and Mid Cap on Nasdaq Stockholm?

1.5 Expected Contribution

This study, unlike previous research, will focus on industry specific comparisons of stock-based compensation. The study will be an empirical investigation of listed Swedish companies, of which there is currently little thorough public research available for. This study furthermore aims to contribute both to businesses as well as to the academic literature. This includes clarifying what types of incentives are best suited in industrial companies compared to service companies. The academic contribution will be focused on how the outcomes of stock-based compensation programs differ, and from this, conclusions will be drawn with the aim of guiding businesses on how to choose the right incentives.

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1.6 Disposition

The first chapter, Introduction, aims to provide the reader with a basic understanding of why the subject and problem are worth investigating by stating the purpose of the thesis and expected contribution. The research questions of the thesis will also be presented here.

The second chapter, An Overview of Stock-based Compensation Program Types, will provide an overview of different types of stock-based compensations programs.

The purpose of this is for reader to get a general view of the most common financial instruments involved in the programs.

The third chapter, Literature Review and Theory, will cover the existing literature and theory, and here previous research within the field is presented. This is for the reader to gain a deeper understanding for the basis of stock-based compensation programs and closely related areas.

The fourth chapter, Tax Law and Self-regulation, will present tax law and self- regulation practices. The section on tax law covers the current Swedish taxation law for stock-based compensation in Sweden. The other section covers self-regulation and is focused on what recommendations and guidelines exist in Sweden for compensation programs.

The fifth chapter, Methodology, will describe the chosen methodology for the research behind his paper. This will include decisions regarding which variables and test samples to analyze as well as data gathering.

The sixth chapter, Results, will present results of the statistical study of collected data. This will involve examining different program configurations and total shareholder returns.

The seventh chapter, Analysis, outlines the analysis of results, the theoretical alignment and the tax circumstances of the investigated stock-based compensation programs.

The eight chapter, Discussion, contains a discussion of the methodology, data, results and analysis of this thesis. This will cover alternative perspectives and issues not taken into account in the study.

The ninth chapter, Conclusions and Implications, covers the main conclusions from the thesis, divided into key findings, managerial implications and future research.

This chapter aims to answer the research questions of this study as well as outline what implications the results have on the market and the investigated companies.

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Chapter 2

An Overview of Stock-based Compensation Program Types

This chapter provides an overview and history of the stock-based compensation programs which are commonly used in listed Swedish companies. The purpose of this is to give the reader a general view of the most common financial instruments involved in the programs.

2.1 Call Options

Call options are contracts which grant the owner the right to buy shares of stock in a company at a certain price (Berk and DeMarzo, 2013). Call options therefore provide upside potential at a fixed cost for the program participant.

2.2 Warrants

Warrants are financial contracts which give the holder the right to buy or sell securities at a certain price, most commonly shares of stock (International Monetary Fund, 1998; Nasdaq, n.d.). Warrants are similar to options, with the main difference being that warrants can only be issued by the company itself, and a share obtained from exercising a warrant has to be issued for delivery to the warrant holder. Therefore warrants can be dilutive, that is, they could lower the value of existing shares of stock if exercised.

2.3 Savings Shares

Savings shares are a stock-based compensation structure in which employees are offered to acquire shares at market value (Lidén et al., 2016). Given continued employment, the employee is granted the right to, for every purchased share, receive one or more additional shares at zero cost or at a discount. These additional shares are typically granted at the end of the program period.

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CHAPTER 2. AN OVERVIEW OF STOCK-BASED COMPENSATION PROGRAM TYPES

2.4 Performance Shares

Performance shares are shares of stock which are awarded to employees given continued employment and given that certain performance criteria has been fulfilled during a set period of time (Center on Executive Compensation, n.d.). Common performance criteria include total return to shareholders, EPS, EBIT and revenue.

2.5 Employee Stock Options

Employee stock options are options which grant the holder the right to buy stock in the company at a certain price (U.S. Securities and Exchange Commission, 2014).

Employee stock options are, as implied by the name, issued to employees. They also typically carry restrictions on the owner’s right to dispose of the option, and are most commonly contingent on the employee’s continued employment (Bengtsson, 2016).

2.6 Convertible Debt

Convertible debt is a debt security which can be converted into a different security under certain terms, most commonly into shares of the company’s stock (U.S.

Securities and Exchange Commission, 2012).

2.7 Synthetic Options

Synthetic (call) options give the holder the right to receive the cash difference, if positive, between the future share price and a predetermined exercise price (Bengtsson, 2016). Synthetic options have the same payoff structure as normal options, but have cash payouts rather than stock. The purpose of synthetic options is to provide certain employees with the upside of stock value increases without giving up ownership of the company.

2.8 Frequency of Programs

PwC conducts an annual study of newly undertaken stock-based compensation programs by companies listed on Large cap, Mid cap, Small cap and First North of Nasdaq Stockholm (Lidén et al., 2016). The figures presented hereafter in this paragraph are cited from PwC’s study. Warrants were the most common type of stock-based compensation program among newly undertaken programs in 2015 by companies listed on Nasdaq Stockholm. Warrants made up 40% of all such new programs overall, and were disproportionately more common among smaller companies listed on First North and Small Cap, and less common in Mid Cap and Large Cap firms. Savings shares made up 29% of all new stock-based compensation programs undertaken in 2015 by companies listed on Nasdaq Stockholm. Savings shares were most common in Large Cap and Mid Cap companies, and less common in Small

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Cap companies, and nonexistent in companies listed on First North. Performance shares made up 13% of all new stock-based compensation programs undertaken in 2015 by companies listed on Nasdaq Stockholm. Performance shares were most common in Large Cap companies, much less common in Mid Cap and Small Cap, and nonexistent in companies listed on First North. The more uncommon program types include employee stock options, call options, convertible debt and synthetic options, which occur with a frequency of 6%, 4%, 3% and 2%, respectively. Figure 2.1 shows the distribution of all these stock-based compensation program types undertaken in 2015.

Figure 2.1: Distribution of new stock-based compensation programs undertaken in 2015 by companies listed on Nasdaq Stockholm (Lidén et al., 2016).

2.9 Historical Overview of Stock-based Compensation in Sweden

Since 1973, Swedish companies have been able to issue convertible debt (SFS 1973:302- 305, 1973). Starting in 1985, there was a large increase in the number of convertible bonds issued on the Swedish market, primarily for the purpose of providing compensation to employees (Sörensson, 1993). During the 1980’s, more than 16 billion SEK worth of convertible bonds were issued to employees, most of which occurred in the last three years of that decade (Sköldebrand, 1989). Convertible bonds were a favorable way to compensate employees from a tax perspective, as well as a method of allowing them to partake in the upside (and downside risk) of a company’s performance. The outcome of such issues up until October 15, 1992, resulted in payouts

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of on average 2.8 times the initial investment, where the typical program duration was five years (Sörensson, 1993). There were however also several disappointments among employees who purchased convertible bonds from employers which later went bankrupt.

During the middle of the 1990’s, convertible debt started losing ground to the ever more increasingly popular option programs, where Investor AB’s option program of 1993 became somewhat of a guideline for large companies (Marin et al., 1999). There- after the rest of the Wallenberg sphere and several other companies began adopting similar programs. The trend continued to grow towards the end of the 1990’s, where IT companies in particular used option programs to incentivize employees and com- pete to retain them. The popularity of option programs peaked during the IT boom, which became the turning point for a new tendency towards share-based programs (Edhall and Boström, 2011). This is to some extent the result of criticism of options focusing on the fact that they delivered unreasonably high payouts to executives who underperformed but happened to be in the right industry at the time.

By the beginning of the 21st century, option programs such as warrants, employee stock options and call options made up roughly 90% of all stock-based compensation programs in companies listed on the Stockholm Stock Exchange (Lidén et al., 2016).

At this point in time, the percentage of share savings and performance share programs were both in the lower single digits. The proportion of savings share programs has since steadily increased, making up 29% of all programs in companies listed on Nasdaq Stockholm in 2015, and performance shares making up 13%. This has primarily occurred at the expense of a decrease in the share of employee stock options, which represented almost 40% of all programs in 2002, but only 6% of programs in 2015. The use of warrants, call options and convertible debt has remained relatively consistent during this period. Following the financial crisis of 2008, the interest in stock-based compensation programs declined significantly in 2009 and 2010 (Johans- son, 2012). Adoption of new stock-based compensation programs has since been increasing (Frigell, 2016).

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Chapter 3

Literature Review and Theory

This chapter provides an overview of existing literature on executive incentives and compensation. This includes issues such as incentive dynamics, underlying performance targets and method of payout.

3.1 The Principal-Agent Problem

The principal-agent problem, or agency theory, is the study of relationships where an agent acts on behalf of a principal (Ross, 1973). In the case of shareholders and firm executives, the executives are agents acting on behalf of shareholders (Jensen and Meckling, 1976). Under the assumption that both parties in the agency relationship aim to maximize their own utility, there is a risk that the agent does not always act in the best interest of the principal. The principal may seek to limit or avoid this, and can take two different approaches. The first one is to set appropriate incentives, and the second one is to introduce monitoring of the agent. The second approach limits the agent from certain actions and is associated with a cost. In general it is impossible to, at zero cost, ensure that the agent will make optimal decisions from the principal’s perspective.

The costs of agency can be divided into three categories (Jensen and Meckling, 1976): (1) monitoring costs, which are incurred by the principal, (2) bonding costs, which are incurred by the agent to commit to contractual obligations that restrict the agent’s activity, and (3) residual losses, which is the cost of suboptimal decisions committed by the agent on behalf of the principal, despite existing monitoring and bonding costs.

3.2 Equity Ownership and Firm Performance

Agency costs arise when an agent receives less than 100% of the value of the output produced by that agent (Murphy, 2012). The lower a CEO’s percentage ownership in his or her company, the less volatile his or her wealth is in relation to a change in

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CHAPTER 3. LITERATURE REVIEW AND THEORY

the market value of the company, and therefore the weaker his or her performance incentive is with respect to maintaining and increasing market value. Jensen and Murphy (1990b) find that, in a sample of 2,213 CEOs between 1974-1986, average CEO wealth changes $3.25 per $1,000 change in shareholder wealth. From this finding, the argument arises that ”compensation of top executives is virtually independent of performance” (Jensen and Murphy, 1990a). Hall and Liebman (1998) suggest that a superior method of measuring CEO incentives is the change in CEO wealth for a 1% change in the value of the firm, rather than as the total ownership share. They show that there is in fact a close relationship between CEO compensation and firm performance. They also attribute almost the entire wealth change effect to changes in the value of stock and stock options. It is further argued that, in theory, salary and bonuses could mirror the variation in stock and stock option valuations, but that corporate boards are reluctant to reduce CEO pay even following poor firm performance. In 1992, each 1% change in market capitalizations of companies in the S&P 500 resulted in a $181,000 change in wealth for the median CEO (Murphy, 2012).

Based on 150 manufacturing firms, Mehran (1995) finds that the percentage of equity held by managers is positively related to firm performance. However, the share of executives’ stock-based compensation and their percentage equity holdings is nega- tively correlated, indicating that boards recognize that the larger the equity holding of the CEO, the weaker the incentive from an additional share of stock. Core and Larcker (2002) analyze 195 firms across different sectors which adopt target ownership plans¹. Typically, the managers of such firms have low equity ownership prior to the implementation of the plan. It was found that return on assets and return on equity performance improves following the adoption of the plan.

Elayan et al. (2003) find that there is a statistically significant positive relationship between Tobin’s q and both CEO compensation and executive share ownership.

This is consistent with the findings of Chung and Pruitt (1995), who conclude that a firm’s market value, executive stock ownership and Tobin’s q are jointly determined. Not only does executive equity ownership positively impact Tobin’s q, but the former is also determined as a response to the latter. This further suggests that firms do recognize executive equity ownership as an important incentive. Coles et al.

(2004) find that there is a strong relationship between managerial compensation and investment policy, debt policy and firm risk. Higher sensitivity of CEO wealth to stock volatility leads to riskier policy choices such as increased R&D investment, less PP&E investment and higher leverage.

3.3 Explaining the rise in CEO Compensation

Prior to 1970, there were low levels of pay (compared to contemporary levels) and little variance across top managers (Frydman and Jenter, 2010). Between 1983 and

1A target ownership plan aims to increase the equity holdings of executive managers to a certain level.

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1991, median expected pay for CEOs in the S&P500 increased by an average of 4.3% annually (adjusted for inflation), and by an average of 15.7% between 1991 and 2001, after which it has leveled off (Murphy, 2012). Furthermore, most of the increase in pay between 1991 and 2001 is the result of increases in the value of stock options granted. The main theories put forward which seek to explain the high levels of CEO compensation are the managerial power view and the efficient contracting view (Frydman and Jenter, 2010). The former view of managerial power upholds that high CEO compensation levels are the result of powerful CEOs who have a significant ability to influence and set their pay at the expense of shareholders.

The latter view of efficient contracting is the principle of market competition, where companies simply have to bid in the marketplace for talented CEOs, and that their pay level therefore is the market value of their labor. The next two sections outline these two views in greater detail.

3.3.1 Managerial Power

The managerial power hypothesis, also referred to as rent² extraction, is CEOs’

abilities to set their own compensation level (Bebchuk and Fried, 2004). This view therefore assumes weak governance from boards of directors, whom are otherwise generally responsible for CEO compensation levels. Furthermore Bebchuk and Fried predict that that a significant part of the rent extraction occurs through forms of pay more difficult to observe and value, such as stock options, perquisites, pensions and severance pay. This is due to the fact that easily observable increases in compensation may risk attention from outside critics, which limits pay levels since one typically wants to avoid public disapproval. Kuhnen and Zwiebel (2009) model CEOs who have the ability to set their own pay, with both observable and unobservable components. The model is constrained such that too much rent extraction will get a CEO fired. This leads to the result that rent extraction exists at an equilibrium level, because firing and replacing carries a significant overhead cost, and replacement CEOs can also extract rents.

The managerial power hypothesis is supported by the widespread use of compensation which is hard to observe (perks, pensions, severance pay etc.), because it is difficult to explain under the opposing assumption of efficient contracts (Frydman and Jenter, 2010). Although these components of compensation may be optimally set, the fact that they are often hidden from shareholders may suggest that they are partly the result of rent extraction. Furthermore, another phenomenon which may suggest that rent extraction is occurring is the fact that CEOs tend to be rewarded for positive market events that are not in their control, such as cycles of economic prosperity or other events that can be considered lucky, but they are not equally punished for negative events that are outside their control.

2Rents is a term used to refer to excess returns that firms or individuals achieve as a result of their positional advantages.

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A significant criticism of the managerial power hypothesis is that it does not explain the large rise in CEO compensation in the end of the 20th century (Murphy, 2012). In fact, most indicators show that corporate governance has strengthened considerably over this period. Furthermore, rent seeking can be compensated for through reductions in other forms of pay, such that a higher total compensation is not achieved. Murphy also notes that the most generous and widely criticized option and severance payouts over the past two decades have been the result of formal employment agreements negotiated with external candidates, and not deals reached with powerful incumbent managers.

3.3.2 Efficient Contracting

Efficient contracting is the view that the growth in CEO compensation is the efficient result of increasing demand for CEO labor or scarce managerial talent in the market (Frydman and Jenter, 2010). One component of this view is that CEO pay is justified in rising with firm size, because larger firms will typically require more skilled CEOs.

Thus if CEO talent is more valuable in larger firms, those firms should be both able and willing to offer higher levels of compensation. Furthermore, small incremental improvements in CEO talent can entail large increments in firm value because of the scale of operations which the CEO controls. Gabaix and Landier (2008) model this effect in companies, and in their framework which uses specific assumptions about the distribution of CEO talent, they conclude that CEO compensation should move at a one-to-one ratio with firm size for the average company. They therefore argue that the sixfold rise in CEO compensation from 1980 to 2003 is completely explained by the corresponding sixfold increase in the average market capitalization over that period.

The view of efficient contracts, or competitive market pay, is supported by the fact that better CEO performance tends to lead to higher compensation (Graham et al., 2012). Furthermore, stock prices tend to react positively to announcements of long- term incentive programs (Frydman and Jenter, 2010). Frydman and Jenter also note that firms’ demand for CEO skills have shifted from firm-specific to more general, as seen from a sharp rise of recruitment of CEOs from outside the company during the past three decades. This leads to CEOs being more mobile across sectors, allowing them to gain broader business experience. Therefore not only has CEO competence been broadened, but there is much greater external demand for talented CEOs.

One main criticism against efficient contracting is that the increased CEO competence has not changed rapidly enough to justify the sharp increase in CEO compensation after the 1980’s (Murphy, 2012). Furthermore, the efficient contracting view does not provide an explanation for the massive use of stock options that arose during this period. For instance, no other forms of compensation were lowered to balance out the large option-based portion of total compensation.

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3.4 Compensation and Macroeconomic Fluctuations

Oxelheim et al. (2008) analyze all Swedish firms listed on the Large Cap, Mid Cap and Small Cap sections of Nasdaq Stockholm during 2001-2006, investigating the impact of macroeconomic fluctuations on CEO compensation. The investigation ex- cludes stock-based compensation and solely looks into salaries and cash bonuses.

The resulting finding is that CEO compensation is explained to a substantial extent by macroeconomic fluctuations. This implies that it is not necessarily performance that is the underlying criteria for compensation, but rather the general market conditions that are beyond the reach of control for CEOs. Althrough this study completely excluded stock-based compensation, it is perhaps reasonable to believe that this portion of compensation would just further add to the volatility in total compensation because of the full exposure to the stock market.

3.5 Indexed Stock Options

Johnson and Tian (2000) suggest a pricing model for indexed stock options, a type of option where the strike price is indexed to a benchmark (i.e. the strike price will vary over time). In this regard, option payoff can be tied to excess, rather than gross, stock return. The argument can be made that traditional options do not provide ade- quate incentives because a CEO can, for instance, underperform in a bull market yet still receive a significant payout from stock options. An indexed option would solve this dilemma such that only performance which exceeds market returns will result in a payoff. Hall and Murphy (2003) note that despite this argument for indexed stock options, they are virtually nonexistent. Two potential reasons are provided for this.

First, indexed options must be expensed in accounting statements under US GAAP, resulting in lower reported income, whereas traditional options are not expensed.

Second, indexed options are much less likely to be in the money after several years.

The reason for this is that stock returns will always be skewed upwards, since the minimum stock return is minus 100% while there exists no upper bound. For this reason, less than half of the companies in an index will have returns that exceed the average. It follows that although indexed options cost the company less to grant, it reduces the value even more for the executive because an option that is more likely to expire worthless will provide a weaker incentive.

Meulbroek (2001) shows that indexed stock options do not function as its proponents intend, rather, their payoffs remain very sensitive to market or industry price changes.

Meulbroek proposes an alternative option design with an option on a performance- benchmarked portfolio. The option has a fixed exercise price, where the underlying asset is a portfolio of the firm’s stock hedged against market and industry price movements. This design removes the effect of market or industry performance from the value of the option.

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3.6 Perceived Cost

The foundation for providing incentives to managers is that they must have a concen- trated exposure to firm-specific risks (Meulbroek, 2000). This leads to the obvious fact that those managers will hold undiversified portfolios, thus preventing managers from optimal portfolio diversification. However, a consequence of this is that the undiversified managers will value stock and stock options less than their market value. The reason for this is that under portfolio theory, investors are not compensated for diversifiable risk (Berk and DeMarzo, 2013). Compensation consultants and academics typically use standard option pricing models such as Black-Scholes to value stock options, but, as shown by Hall and Murphy (2002), undiversified managers will value options less than their Black-Scholes value. For this reason, firms face a trade-off between the benefit of aligning managerial incentives and the cost of paying managers with financial instruments that the firm could otherwise issue at a higher price in the market (Meulbroek, 2000). In other words, the cost of executive stock options for the company is greater than the value of those options to the CEO (Murphy, 2002).

3.7 Granting Options In or Out of the Money

Conventional wisdom would likely assert that options should be granted at the money, while yet others may argue options should be granted out of the money to create tougher performance targets (Hall and Murphy, 2003). However, Hall and Murphy (2002) find that granting options at exercise prices below the market price at grant date provides the largest incentive. If options are granted in the money, this ensures that executives face an immediate change in wealth for both increases and decreases in stock price, as opposed to out of the money and at the money options which offer only upside potential.

3.8 Summary and Positioning of Study

In summary, the principal-agent problem is the foundation for setting up compensation programs to align executive incentives with the interests of shareholders. An executive’s equity ownership in his or her company has been shown in several stud- ies to be positively related to the company’s performance (Mehran, 1995; Chung and Pruitt, 1995; Hall and Liebman, 1998; Core and Larcker, 2002; Elayan et al., 2003; Coles et al., 2004). There is a debate regarding the reason for significantly increased levels of CEO compensation since the 1990’s, where the two main theories are managerial power and efficient contracting. Furthermore it is found that CEO compensation in Swedish public firms during the beginning of the 21st century is largely the result of market conditions, rather than CEO performance (Oxelheim et al., 2008). A potential method of tying compensation closer to performance rather than market conditions would be through the use of indexed stock options, where

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payouts are adjusted for market or sector returns (Meulbroek, 2001). Considering the dynamics of incentives, it has been demonstrated that executives will value stock options in their company less than the cost of those stock options due to the executive’s necessary lack of diversification (Murphy, 2002). Lastly, a method of increasing the strength of provided incentives is to grant options in the money, which ensures that recipients have immediate downside risk (Hall and Murphy, 2002).

This study, unlike previous research, focuses on industry specific comparisons of stock-based compensation in relation to shareholder return. The study is also an empirical investigation of public Swedish companies, of which there is currently little thorough public research available for.

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Chapter 4

Tax Law and Self-regulation

This chapter outlines current legislation and regulation in the Swedish market concerning taxation of stock-based compensation, as well as guidelines and recommendations for compensation policy.

4.1 Swedish Tax Law

In a comprehensive public investigation concerning taxation of incentive programs, carried out on behalf of the Swedish government, Bengtsson (2016) finds that taxation of stock-based compensation is primarily a question of timing and income categorization. Income categorization refers to whether the income is taxed as ordinary income or as capital gains. Income attributable to stock-based compensation and other incentive programs are subject to taxation by one out of three rules from the Swedish income tax act (Inkomstskattelag, 1999:1229).

The securities rule¹ (10 kap. § 11 first section, 1999:1229 Inkomstskattelag) applies to acquisition of securities, while the employee stock option rule² (10 kap. § 11 second section, 1999:1229 Inkomstskattelag) applies to contracts for future acquisition of securities, where the contract itself is not considered a security. Income from stock-based compensation and other incentive programs that does not fall within either the securities rule or the employee stock option rule is subject to the general provision of taxation timing for ordinary income (10 kap. § 8, 1999:1229 Inkomst- skattelag).

4.1.1 Taxation of Employee Benefits

Employee benefits constitute a tax liability for Swedish employees and are taxed as ordinary income (10 kap. § 1, 1999:1229 Inkomstskattelag). These include, for instance, benefits relating to fitness, health and health care, having access to a company car, gifts, and incentive programs (Skatteverket, n.d.a). The tax liability occurs

1Värdepappersregeln, in Swedish.

2Personaloptionsregeln, in Swedish.

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CHAPTER 4. TAX LAW AND SELF-REGULATION

in the year that the benefit is acquired, and the taxable amount is calculated as the difference between the market value of the product or service and the cost at which it is offered to the employee by the employer. In the case of stock-based compensation, this may be in the form of allowing executives to acquire stock at a discount.

The benefit of acquiring stock must therefore be valued before the taxable amount can be calculated. There exists an exception in when acquisition of shares of stock at a discount are not tax liable as a benefit, which occurs when individuals outside the company or group are also allowed to partake in the offer, under the constraint that employees in the company or group do not acquire more than 20% of the total offering of shares and that no individual employee, because of his or her employment, acquires shares for a total cost greater than 30 kSEK (11 kap. § 15, 1999:1229 Inkomstskattelag).

4.1.2 The Securities Rule

The securities rule states that the employee which, because of his or her employment, acquires securities on favorable terms, shall be taxed for that benefit in the year that the securities are acquired (10 kap. § 11 first section, 1999:1229 Inkomstskattelag).

The central issue is therefore to determine what constitutes a security and when a security has been acquired.

What Classifies as a Security?

There does not exist a legal definition of what constitutes a security for Swedish tax purposes (Bengtsson, 2016). Instead, this is assessed on a case-by-case basis depending on the contract. However, in the preparatory work for the Financial Instruments Trading Act (Lag om handel med finansiella instrument, 1991:980), what is commonly considered to be a security is explained as follows, translated from its original formulation in Swedish (Prop. 1990/91:142, 1990):

A security refers to a document which grants the holder a certain right which can customarily be converted to cash. Traditionally, stocks, bonds, debentures, fund shares, bills, checks and some other debt instruments are considered to be securities.

An instrument which grants the right to acquire shares of stock may not constitute a security if there are any present restrictions on the employee’s (the owner’s) right to dispose of that instrument. This principle has been upheld by previous historical rulings by the Swedish Supreme Court (Bengtsson, 2016). For instance, an option that is not contingent on continued employment, and is freely tradable, will very likely be classified as a security. However, an option which expires upon termination of employment and may not be traded, is not classified as a security from a taxation perspective, but instead as a special category of options called employee stock options. Employee stock options are discussed further in section 4.1.3.

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When is a Security Acquired?

Because securities acquired as a result of employment are taxed as benefits in the year they are acquired, the time of acquisition must be determined. From a contract law perspective, a security has been acquired when the contracted agreement has been entered into (Bengtsson, 2016). In civil law, there is a distinction between resolutive and suspensive conditions. A resolutive condition is a condition in which rights and obligations come into existence immediately upon agreement between the parties, while a suspensive condition is a condition which suspends rights and obligations until an uncertain future event occurs (Norton Rose Fulbright, 2009).

When a contract contains resolutive conditions, this is interpreted as the security having been acquired upon the entering into of the agreement. However, when a contract contains suspensive conditions, the agreement is not considered to be entered into until the conditions are met. Suspensive conditions therefore defer the acquisition date of the contracted security. It is the contracting parties that determine the conditions of the contract, and it is therefore also the parties that implicitly determine whether the acquisition of securities has occurred at the date of the agreement, or at a later date (Bengtsson, 2016).

4.1.3 The Employee Stock Option Rule

If an employee, because of his or her employment, acquires an instrument that is not classified as a security in the sense outlined in the previous section, but is instead a contract which grants the right to acquire securities at a favorable price or on other favorable terms in the future, then the employee stock option rule is applicable (10 kap. § 11 second section, 1999:1229 Inkomstskattelag). An employee benefit does not arise until the option holder exercises his or her right to acquire securities at a price lower than the market price (Bengtsson, 2016). The difference between the market value of the underlying stock at the time of exercise and the strike price is the amount which is tax liable as an employee benefit.

The employee stock option rule does not include a legal definition of which options and rights that constitute employee stock options (Bengtsson, 2016). However, it is presumed that in order for the right to be considered an employee stock option, the underlying right must be a security or financial instrument. Furthermore, employee stock options are options which in some manner are contingent on continued employment and restricted for trading.

4.2 Self-regulation in the Market

In 1995, the Swedish private sector established the Association for Generally Ac- cepted Principles in the Securities Market, a non-governmental organization with the purpose of meeting increased demand for transparency, efficiency and long-term stability in organizations and financing in publicly listed companies (Svernlöv, 2009).

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The Association for Generally Accepted Principles in the Securities Market does this through its specialist bodies, the Swedish Securities Council, the Swedish Corporate Governance Board and the Swedish Financial Reporting Board. The former two entities have issued recommendations and guidelines for the design of executive compensation policy.

There also exist other non-governmental organizations which involve themselves in promoting certain methods of business, for instance the Confederation of Swedish Enterprise, which represents roughly 1.5 million employees in 60,000 different companies (The Confederation of Swedish Enterprise, n.d.). The Confederation of Swedish Enterprise, founded in 2001, has the mission of aggressively promoting free enterprise in Sweden, along with public and political awareness of the importance of Swedish enterprise (The Confederation of Swedish Enterprise, n.d.). The Confederation has issued recommendations for executive compensation policy fully in line with the guidelines provided by the Swedish Securities Council and the Swedish Corporate Governance Board.

The recommendations and guidelines issued by the Swedish Securities Council and the Swedish Corporate Governance Board are outlined in the following subsections.

Recommendations provided by the European Commission are subsequently also presented. All recommendations in the following subsections are presented for purposes of providing a basis for analysis, and are neither endorsed nor rejected.

4.2.1 Swedish Securities Council

The mission of the Swedish Securities Council (Aktiemarknadsnämnden) is to promote generally accepted principles in publicly listed Swedish companies through issuing statements and providing advisory and information (Svernlöv, 2009). The Council has issued statements on incentive programs (The Swedish Securities Coun- cil, 2002, 2010), which include the recommendation that the payout from incentive programs are limited by an upper bound. Furthermore, incentive programs should be approved by a decision during the annual general meeting, the programs should state which categories of employees are affected, and they should specify the principles by which securities offered in the program are acquired. The generally accepted principles also include that the underlying criteria by which performance is measured should be specified, but the levels of performance which justify payouts from the program must not be disclosed until the time at which the program expires, for reasons of competition.

The Swedish Securities Council recommends that shareholders are informed of the market values of securities used in incentive programs, and at which price they are able to be acquired (The Swedish Securities Council, 2002). For stock-based compensation programs that do not lead to dilution, it is sufficient that shareholders are informed of the magnitude of the costs that may be incurred by the program.

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The Council explicitly offers no recommendation on controlling the dilutive effect of issuing new equity to pay recipients of incentive program payouts.

4.2.2 Swedish Corporate Governance Board

The mission of the Swedish Corporate Governance Board (Kollegiet för Svensk Bo- lagsstyrning) is to manage and administer the Swedish Corporate Governance Code, which contains guidelines for generally accepted principles in various corporate governance issues (Svernlöv, 2009). The Swedish Corporate Governance Board monitors and analyzes the practical application of the code and may modify the code when deemed appropriate. Furthermore the Swedish Corporate Governance Board follows the international developments in corporate governance to maintain an up-to-date recommended practise. It does not, however, monitor or judge the application of the code by individual companies. Nasdaq Stockholm, on the other hand, may determine whether the companies that apply the code do so in a proper manner. Ultimately it is the actors of the capital markets who determine whether a company’s method of application of the code instills confidence or not, and which consequences this has on investors’ willingness to invest in that company’s stock. The Swedish Corporate Governance Code includes eight principles concerning compensation (remuneration) for senior executives, summarized below (The Swedish Corporate Governance Board, 2016).

1. The board is to establish a remuneration committee, whose main tasks are to prepare, monitor and evaluate the board’s decisions relating to remuneration, programmes for variable remuneration and application of guidelines for remuneration.

2. The chair of the board may chair the remuneration committee. The other shareholders’ meeting-elected members of the committee are to be independent of the company and its executive management.

3. If the remuneration committee or the board uses the services of an external consultant, it is to ensure that there is no conflict of interest regarding other assignments this consultant may have for the company or its executive management.

4. Variable remuneration is to be linked to predetermined and measurable performance criteria aimed at promoting the company’s long-term value creation.

5. Variable remuneration paid in cash is to be subject to predetermined limits regarding the total outcome.

6. The shareholders’ meeting is to decide on all share and share-price related incentive schemes for the executive management. The decision of the shareholders’

meeting is to include all the principle conditions of the scheme.

7. Share and share-price related incentive programmes are to be designed with the aim of achieving increased alignment between the interests of the participating

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individual and the company’s shareholders. The vesting period or the period from the commencement of an agreement to the date for acquisition of shares is to be no less than three years.

Programmes that involve acquisition of shares are to be designed so that a personal holding of shares in the company is promoted.

Programmes designed for board members are to be devised by the company’s owners and to promote long-term ownership of shares.

8. Fixed salary during a period of notice and severance pay are together not to exceed an amount equivalent to the individual’s fixed salary for two years.

4.2.3 European Commission Recommendations

The European Commission (EC) has issued recommendation 2009/385/EC (Euro- pean Commission, 2009) concerning remuneration of directors of listed companies.

Among these, it is recommended that companies set limits to variable compensation, and that variable compensation is subject to predetermined and measurable performance criteria. Furthermore the EC recommends that performance criteria should promote the long-term sustainability of the company and include non-financial criteria. Additionally, when variable compensation is awarded, a major part of that compensation should be deferred for a minimum period of time. The compensation contract should include provisions that permit the company to reclaim variable compensation that was based on data later proven to be misstated. Any termination payments³ should not exceed two years of non-variable remuneration, and should not be paid at all if the termination is due to insufficient performance.

Specific recommendations for stock-based compensation issued by the EC include that shares should be awarded after a program duration of a minimum of three years (European Commission, 2009). Similarly, any stock options or other rights to acquire shares should not be exercisable for at least three years after their reward. The award of shares and the right to exercise stock options and other rights to acquire shares should be subject to predetermined and measurable performance criteria. The EC further recommends that after awarding shares, directors should retain a minimum number of shares until the end of their mandate. An example provided is retaining a total value of shares equal to or greater than twice the value of total annual compensation. Lastly, remuneration of non-executive or supervisory directors should not include stock options.

The EC recommendations (European Commission, 2009) further state that an explanation of how the choice of performance criteria contributes to the long-term interests of the company should be provided. Explanations of the methods applied to determine whether performance criteria are met should also be provided, along

3A termination payment is a payment awarded to an employee upon the termination of his or her employment.

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with sufficient information regarding the policy and terms of termination payments, awarding shares, and share retention after their award. The process by which remuneration is determined should involve a remuneration committee, which periodically reviews the company’s remuneration policy, it’s implementation and ensuring directors’ compensation are proportionate. The committee should have at least one member with knowledge and experience in remuneration policy.

The EC later issued a proposal which would require that the director-worker pay gap must be explicitly justified in compensation policies, and would give shareholders the right to vote down the ratio between director pay and the pay of the average full time workers (European Commission, 2014). The proposal was met with significant criticism, primarily focusing on that shareholders indirectly already posses this power, and that encouraging shareholder micro management would lead to in- efficiency (Barker, 2014).

4.2.4 Summary of Guidelines and Recommendations

The guidelines and recommendations presented in the previous sections are summarized in Table 4.1 (The Swedish Securities Council, 2002, 2010; European Commis- sion, 2009; The Swedish Corporate Governance Board, 2016).

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Table 4.1: Guidelines and recommendations regarding executive compensation (The Swedish Secu- rities Council, 2002, 2010; European Commission, 2009; The Swedish Corporate Governance Board, 2016).

Swedish Swedish Corporate

Securities Governance European

Guideline/Recommendation Council Board Commission

Upper payout limit x x⁴ x

Annual general meeting approval x x

State category of affected employees x

Specify terms by which securities are acquired x x Variable compensation shall be linked to prede-

termined and measurable performance criteria x⁵ x x Inform shareholders of market value of involved

securities x

Inform shareholders of acquisition price of in-

volved securities x⁶

Involve a remuneration committee x x

Remuneration committee members are to be independent of the company and its executive management

x⁷

Ensure there are no conflicts of interest for any

involved external consultants x

Minimum time until exercise/award for securities x⁸ x⁹ Promote personal holding of shares (for pro-

grams that involve acquisition of shares) x x

Fixed salary during period of notice and sever-

ance pay should not exceed two years fixed salary x x Performance criteria should promote long-term

sustainability of the company x

Performance criteria should include non-financial

criteria x

Compensation contract permits company to reclaim variable compensation based on data later proven to have been misstated

x

Include explanation of how performance criteria

contributes to long-term performance x

4Only for variable compensation paid out in cash.

5Level of performance for payout must not be specified until program expiration.

6For compensation without dilution, it is sufficient to specify the magnitude of costs potentially incurred.

7Except for the chairman of the company, who may also be the chairman of the remuneration committee.

8Minimum three years.

9Minimum three years.

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Chapter 5

Methodology

This chapter outlines the research method by which the research questions of this report are analyzed.

5.1 Research Design

The research will be conducted as a quantitative empirical study of industrial and service companies listed on Nasdaq Stockholm in the Small Cap and Mid Cap seg- ments. The focus of the research is to first map out the stock-based compensation programs for executive managers during a time period of five years as a foundation for analysis of these programs in three main areas. Firstly the companies will be analyzed from the perspective of how well they follow the recommendations from both Swedish non-governmental organizations, as well as guidelines from the Euro- pean Commission, regarding stock-based compensation. Secondly the investigated programs will be analyzed with respect to current research regarding stock-based compensation for executive managers to identify how well the programs align with existing research. Thirdly the programs will be analyzed with respect to the total return to shareholders (TRS) for the companies, in order to determine whether any specific program properties, or stock-based compensation programs in general, are associated with higher returns.

5.1.1 Investigated Companies

The sample of investigated companies has to be part of the same market as there are differences regarding stock-based compensation programs and the companies on different markets. Tax laws, regulations and market conditions are some factors which make it hard to compare companies on different markets. The chosen market for this study has been the Swedish market, as there is a lack of previous research regarding this market. Furthermore the use of stock-based compensation programs is also fairly common in Sweden, which makes the Swedish market well suited for research in this area. The companies that will be investigated in this study are chosen based on listing, sector and the occurrence of stock-based compensation programs.

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CHAPTER 5. METHODOLOGY

From these basic criteria, the companies are first selected based on their listing, and only companies from the Small Cap and Mid Cap of the Nasdaq Stockholm are present in this study¹. This decision is made to get a better representation of the Swedish market. The decision to only investigate companies publicly listed on Nasdaq Stockholm was made based on the fact that these companies are much more likely to have stock-based compensation programs compared to private companies.

Furthermore the study is focused on the perspective of total return to the shareholders, so this would not be possible to investigate properly in private companies.

Companies listed on the Large Cap section of Nasdaq Stockholm will not be preset in this study as they have a larger part of their operations outside of Sweden. Sec- ondly, only companies listed as part of the sectors Consumer Services and Industrials will be present in this study. These industry classifications part of a classification standard by ICB (Industry Classification Benchmark), which is maintained by the FTSE Group and used by Nasdaq Stockholm (Nasdaq Stockholm, n.d.a). These two categories are chosen based on the research questions’ aim to investigate these specific sectors. Hence the companies of these two sectors will be compared to each other for the purposes of answering the research questions of this thesis. Thirdly, in the list of companies to investigate there will be several that do not offer stock-based compensation programs to the executive managers and some that have other types of compensation programs than stock-based. These companies will only be included in the analysis as a benchmark for comparison of TRS with companies that do offer stock-based compensation programs. The differentiation between companies that do have and do not have stock-based compensation programs is made by gathering data regarding executive remuneration from all companies fulfilling the above criteria.

This data is gathered from company web pages, documents for the company annual general meeting and company annual reports. Lastly, when gathering data for total shareholder return, only regular shares or class B shares will be used in the cases where firms have multiple classes of shares outstanding. To summarize, the focus of this study is on companies with stock-based compensation programs in the sectors Consumer Services and Industrials from the Small Cap and Mid Cap sections on Nasdaq Stockholm.

5.1.2 Decision of Investigated Parameters

The parameters that this study is based on for its analysis include TRS, stock- based compensation programs properties and compensation program recommendations. The first parameter, TRS, is used to be able to analyze what effect stock-based compensation programs are associated with for the shareholders. As the main objec- tive of a listed company is to deliver shareholder value, this parameter is essential for the study. This parameter is easily measured as it is already provided in a numeric format from Nasdaq Stockholm. The second parameter, the stock-based compen-

1Nasdaq’s Nordic Small Cap segment is defined to include companies worth a market capitalization of less thane150m, and Nasdaq’s Nordic Mid Cap segment is defined to include companies worth a market capitalization of more thane150m but less than e1bn (Nasdaq Stockholm, 2016)

Stock-based Compensation and Shareholder Value

Stock-based Compensation and Shareholder Value

ERIK FORSBLOM

LUDWIG SMEDBERG

Stock-based Compensation and Shareholder Value

Erik Forsblom Ludwig Smedberg

Aktiebaserad ersättning och aktieägarvärde

Erik Forsblom Ludwig Smedberg

Acknowledgements

Contents

Chapter 1

Introduction

1.1 Background

1.2 Problem Formulation

1.3 Research Purpose

1.4 Research Questions

1.5 Expected Contribution

1.6 Disposition

Chapter 2

An Overview of Stock-based Compensation Program Types

2.1 Call Options

2.2 Warrants

2.3 Savings Shares

2.4 Performance Shares

2.5 Employee Stock Options

2.6 Convertible Debt

2.7 Synthetic Options

2.8 Frequency of Programs

2.9 Historical Overview of Stock-based Compensation in Sweden

Chapter 3

Literature Review and Theory

3.1 The Principal-Agent Problem

3.2 Equity Ownership and Firm Performance

3.3 Explaining the rise in CEO Compensation

3.4 Compensation and Macroeconomic Fluctuations

3.5 Indexed Stock Options

3.6 Perceived Cost

3.7 Granting Options In or Out of the Money

3.8 Summary and Positioning of Study

Chapter 4

Tax Law and Self-regulation

4.1 Swedish Tax Law

4.2 Self-regulation in the Market

Chapter 5

Methodology

5.1 Research Design