Multi-metric vesting schemes in executive performance equity grants

Using a large sample of executive performance equity grants over 2006-2019, we provide a comprehensive representation of the single- and multi-metric vesting schemes used by U.S. public firms and investigate the incentives provided by alternative functional forms of vesting formulas that combine earnings with stock returns and other non-earnings targets. Our results indicate that, compared to single- and multi-metric summative formulas, binding schemes that require the contemporaneous achievement of both earnings and non-earnings targets for grant vesting limit executive fixation on earnings and the associated incentives to maximize grant payouts by managing earnings around the targets. The findings confirm the expectation of different incentive effects from alternative (linear versus non-linear) aggregations of multiple performance targets in the grant vesting formulas, with binding schemes being more effective in mitigating the risk of executives prioritizing earnings relative to other targets in multi-metric grants.