Compensating the Top: Equity-based Incentives and Financial Misconduct in Top Management Teams

Abstract

This study aims to investigate the relationship between equity-based compensation for top management teams and the likelihood of financial misconduct. Drawing on the Behavioral Agency Model, it is hypothesized that when executives are compensated in larger proportions of stock options, this may increase the risk of misconduct, especially when firms underperform relative to their industry peers. Data from Boardex was used for executive characteristics, financial data from Refinitiv DataStream was used for the firm’s financials, and the Good Jobs First Violation Tracker provided data on financial misconduct. Based on this data, a binary logistic regression was conducted on a panel dataset of S&P 1500 firms from 2000 to 2024. The results indicate that TMT equity-based compensation in the form of stock options was negatively associated with the likelihood of financial misconduct in intermediate models, but this effect became non-significant when the interaction term was added in the full model. The second hypothesis was not supported, as the results indicated that underperformance relative to industry peers did not significantly moderate the relationship between the variables. Overall, the findings revealed that there is no robust evidence for a direct or moderated effect. Keywords: Top management team, equity-based compensation, stock options, financial misconduct, Behavioral Agency Model, S&P 1500