Payout policy decisions: the effect of compensation structures

ABSTRACT

This study examines the relation between CEO compensation structures and corporate payout policies from 2008 to 2015. The literature focuses on equity-based compensation, and few studies emphasize debt-based compensation. These two types of compensation structures have different features and thus induce managers to choose different payout policies. Using total payouts, dividends, and repurchases as three proxies for corporate payouts, we find that the relation between CEO equity-based compensation structures and total payouts is statistically trivial. However, when we break down corporate payout policies into dividend payouts and share repurchases, we find that CEOs with large options holdings decrease dividend payments and increase share repurchases. We also find that CEOs with large inside debt holdings pay more dividends to shareholders, but we find no significant effect on repurchase payouts. Our findings suggest that ignoring compensation types may veil their differing effects on corporate payout decisions.

KEYWORDS:

• Equity-based compensation
• debt-based compensation
• corporate payout policies

Acknowledgments

The authors gratefully acknowledge the financial support of Ministry of Science and Technology (107-2410-H-155-004-MY2) and Yuan Ze University. We have benefited from the helpful comments and suggestions made by Guest Editor (Taychiang Wang), an anonymous referee, Bok Baik, Jia-Chi Cheng, Chuan-San Wang, and seminar participants at 2018 TAA annual meeting and 2019 KAA annual meeting. All remaining errors are our own.

Disclosure statement

No potential conflict of interest was reported by the authors.

Additional information

Funding

Financial support provided by Ministry of Science and Technology, R.O.C. from the grant 106-2410-H-155-020 is gratefully acknowledged.