An Examination of the Incentives to Issue Spring-Loaded Equity Awards

A spring-loaded equity award is an award granted to an employee while the firm possesses non-public, positive information that is released shortly after the equity award is granted. Generally, shareholders oppose these awards, but firms see them as valid rewards for executives. In my study, I examine factors associated with the issuance of spring-loaded awards. I identify potential spring-loaded awards (SLAs) issued to Chief Executive Officers (CEOs) by examining returns shortly following the grant date of equity awards to CEOs. I assign awards to differing levels of potential to be spring-loaded based on these returns. I find that firms are more likely to issue a higher-potential SLA when cost saving is relatively more important and when there is more pressure to do so within their industry. I find that high-potential SLAs are associated with significantly lower grant date fair values, further supporting my finding that higher-potential SLAs are a cost-saving mechanism. However, contrary to shareholder concerns, I find very little evidence that potential SLAs are associated with future firm performance in an additional analysis. My findings help to inform the debate among firms, shareholders, and regulators on the use of spring loading.