The Diffusion of Equity Incentive Plans in Italian Listed Companies: What is the Trigger?

• Author: Alessandro Zattoni,Alessandro Minichilli
• Published date: 01 March 2009
• DOI: http://doi.org/10.1111/j.1467-8683.2009.00732.x
• Date: 01 March 2009

The Diffusion of Equity Incentive Plans in

Italian Listed Companies: What is the Trigger?

Alessandro Zattoni* and Alessandro Minichilli

ABSTRACT

Manuscript Type: Empirical

Research Question/Issue: Recent dynamics in the institutional and market environment facilitated the propagation of

equity incentive plans outside the US and the UK. This study sheds light on the reasons behind the diffusion of these plans

in Italy, a country where companies are usually controlled by a blockholder and these instruments were almost absent.

Research Findings/Results: To gain a deep understanding of the phenomenon, we collected data on both the diffusion and

the technical aspects of equity incentive plans adopted by Italian listed companies in 1999 and 2005. The results show that

1) the determinant of their adoption is the f‌irm size, rather than the absence of a controlling shareholder; 2) these plans are

not extensively used to extract company value, although few cases suggest this possibility; and 3) plans’ characteristics

generally comply with the requirements in tax law, so that f‌iscal benef‌its can be accessed.

Theoretical Implications: Our f‌indings contribute to the expansion of the traditional knowledge about reasons behind the

adoption of equity incentive plans outside Anglo-Saxon countries. Further, they providesupport for a symbolic perspective

of corporate governance, according to which the introduction of new governance practices may not imply substantive

governance reforms.

Practical Implications: Our study recommends that policymakers improvethe disclosure rules about these plans and avoid

the introduction of f‌iscal benef‌its that provide an incentive to promote some compensation schemes over others. Moreover,

our results encourage members of remuneration committees to pay attention to specif‌ic characteristics of the plans.

Keywords: Corporate Governance, Share Options Policy, Board Policy Issues, Italy

INTRODUCTION

Past studies have brought to light the dissimilarities in

the pay packages of managers inAnglo-Saxon countries

as compared with other nations (e.g., Bebchuk, Fried and

Walker, 2002; Cheff‌ins and Thomas, 2004; Zattoni, 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 managers’ pay

schemes. Over time, variable short-term pay has become

more substantial and the impactof fringe benef‌its has gradu-

ally 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 managers 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-term 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 insti-

tutional and market environment at the local and global

levels. Particularly 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 these changes in the institutional

and market environment, we observe a global trend

toward the “Americanizationof international pay practices,”

*Address for correspondence: Management Department,Parthenope University, and

Strategic and Entrepreneurial Department, SDA Bocconi, Via Bocconi 8, 20136

Milano. Tel: 0039-02-58362532; Fax: 0039-02-58362530; E-mail: alessandro.zattoni@

unibocconi.it

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Corporate Governance: An International Review, 2009, 17(2): 224–237

© 2009 Blackwell Publishing Ltd

doi:10.1111/j.1467-8683.2009.00732.x