The Tradeoff between Compensation and Incentives in Executive Stock Options

Document Type

Article

Publication Date

12-1-2011

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.

Publication Source (Journal or Book title)

Quarterly Journal of Finance

First Page

733

Last Page

766

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