Work hard, not smart: Stock options in executive compensation

John Barron () and Glen Waddell ()

Journal of Economic Behavior & Organization, 2008, vol. 66, issue 3-4, pages 767-790

Abstract: This paper examines the optimal equity compensation for executives. When executives choose a level of effort to devote to gathering information and a criterion for acting on the information gathered, the optimal exercise price involves a trade-off; a higher exercise price moves the executive's decision criterion away from first-best but provides leverage that moves the executive's effort toward first-best. This trade-off depends on a variety of factors, including the potential influence of decisions on firm value. We document empirical regularities consistent with the theory such as that options are relatively less prevalent in the equity compensation of more-senior executives.

Date: 2008
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Persistent link: http://EconPapers.repec.org/RePEc:eee:jeborg:v:66:y:2008:i:3-4:p:767-790

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