American Economic Review Vol. 90 No. 2 2000
Optimal Exercise Prices for Executive Stock Options
Abstract
Although exercise prices for executive stock options can be set either below or above the grant-date market price, in practice virtually all options are granted at the money. We offer an economic rationale for this apparent puzzle, by showing that pay-to-performance incentives for risk-averse undiversified executives are typically maximized by setting exercise prices at (or near) the grant-date market price. We provide an operationally useful alternative to Black-Scholes (1973) for the purpose of both valuing executive stock options and measuring the incentives created by options. Our framework has implications not only for exercise-price policies, but also for indexed options, option repricings, exchanges of cash for stock-based compensation, and the design of bonus plans.
- DOI
- 10.1257/aer.90.2.209
- Volume
- 90
- Issue
- 2
- Pages
- 209-214
- Language
- en
- Sources
- bibtex:phds-export.bib openalex crossref