Shareholder Activism and Middle Management Equity Incentives


University at Albany, State University of New York, School of Business, Albany, NY 12222, USA. Tel: 518-442 4957; E-mail:


Manuscript Type: Empirical

Research Question/Issue: We examine how various types of shareholder activists (such as pension funds and large blockholders) impact the relative use of equity incentives at the middle management level of the firm and compare this with the impact on CEO incentive alignment.

Research Findings/Insights: Using a sample of 124 US technology firms over the period 1997–2001, we find evidence indicating voice activist shareholders, using communication pressure, are associated with the greater use of equity incentives, and higher total compensation at middle managerial levels, relative to exit activists, who exert economic pressure. The results for CEO equity incentives are similar. We also find that as the presence of institutional ownership siding with management (banks and insurance companies) increases relative to voice activists, the use of equity incentives at middle managerial levels declines. Results for CEO equity incentives are not the same.

Theoretical/Academic Implications: In agreement with contingent agency theory, we predict and find evidence of differing governance mechanisms used by voice activists (e.g., public pension funds) and exit activists (e.g., large shareholders). Voice activists face a higher cost of monitoring managers as compared to exit activists, and thus they will advocate for the heavier use of equity incentive compensation at the middle managerial level. In agreement with a managerial power perspective, however, we also find the use of equity incentives for middle managers decreases as the proportion of institutional ownership siding with the CEO increases.

Practitioner/Policy Implications: Shareholder activism plays a key role in aligning managerial interests below the CEO level; however, different types of shareholders have different economic and political interests in how equity compensation is shaped to achieve this. Exit activists use monitoring and voice activists substitute equity compensation for monitoring. Shareholders siding with management may also reduce the use of equity incentives for middle managers. These differing interests should be considered in crafting policy responses.