The Tradeoff Between Compensation and Incentives in Executive Stock Options

Don M. Chance () and Tung-Hsiao Yang ()
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Don M. Chance: Department of Finance, 2163 CEBA, Louisiana State University, Baton Rouge, LA 70803, USA
Tung-Hsiao Yang: Department of Finance, 2163 CEBA, Louisiana State University, Baton Rouge, LA 70803, USA

Quarterly Journal of Finance (QJF), 2011, vol. 01, issue 04, 733-766

Abstract: Because stock options have a dual role as both compensation and incentives, a portion of option value represents compensation and a portion represents incentives. We develop a model that measures the tradeoff between the compensation and incentive values of options. Empirical estimates over a 14-year period show that the median option contains $1.08 of incentives for every $1.00 of compensation and that option compensation is around 30% of total compensation. We also find that firms that use options more as a compensation device use fewer options and reduce other cash payments suggesting a resourceful and not abusive use of options.

Keywords: Executive stock options; stock options; executive compensation; incentives; G32; G39; M52 (search for similar items in EconPapers)
Date: 2011
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DOI: 10.1142/S2010139211000225

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