Substance and Symbolism in CEOs' Long-Term Incentive Plans

Both authors contributed equally to the paper. The helpful comments of Jerry Davis, Paul Hirsch, Matt Kraatz, Joseph Moag, James Walsh, and seminar participants at MIT and Stanford University are appreciated. We also thank Ann Yoo for assistance in data collection. This study theoretically and empirically addresses the possible separation of substance and symbolism in CEO compensation contracts by examining political and institutional determinants of long-term incentive plan (LTIP) adoption and use among 570 of the largest U.S. corporations over two decades. We find that a substantial number of firms are likely to adopt but not actually use-or only limitedly use-LTIPs, suggesting a potential separation of substance and symbol in CEO compensation contracts. Analyses suggest that this decoupling of LTIP adoption and use is particularly prevalent in firms with powerful CEOs and firms with poor prior performance. Further analyses show that whereas early adopters are more likely to pursue alignment between CEO and shareholder interests substantively, later adopters may pursue legitimacy by symbolically controlling agency costs. More generally, the study highlights how decoupling in organizations can be understood in terms of both micro-political and macro-institutional forces.'