Stock and Option Proportions in Executive Compensation

Phelim P. Boyle, Ranjini Jha (), Shannon Kennedy and Weidong Tian
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Phelim P. Boyle: School of Business and Economics, Wilfrid Laurier University, Ontario, Canada
Ranjini Jha: School of Accounting and Finance, University of Waterloo, Ontario, Canada
Shannon Kennedy: Department of Applied Mathematics, University of Waterloo, Ontario, Canada;
Weidong Tian: Department of Finance, University of North Carolina at Charlotte, North Carolina, USA 28223, USA

Quarterly Journal of Finance (QJF), 2011, vol. 01, issue 01, 169-203

Abstract: There is controversy about the relative merits of stock and options in executive compensation. Some observers contend that stock is a more efficient mechanism, while others reach the opposite conclusion. We focus on the manager's risk-taking incentives and derive an optimal compensation contract by using the concept of a comparable benchmark and imposing a volatility constraint in a principal-agent framework. We demonstrate a joint role for both stock and options in the optimal contract. We show that firms with higher volatility should use more options in compensating their executives and provide empirical evidence supporting this testable implication.

Keywords: Executive stock options; executive compensation; managerial incentives (search for similar items in EconPapers)
Date: 2011
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DOI: 10.1142/S2010139211000055

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