Journal of Corporate Finance Vol. 12 No. 2 2006
Employee stock options in compensation agreements: A financing explanation
Abstract
We develop a model for the use of stock options in compensation agreements based on a financing explanation. Our model is consistent with the extensive use of options for non-executive employees. Simulation results from our model show an optimal use of options of about 9.3% of total compensation for a non-executive employee with a compensation of US$50,000. Finding an optimal level of options as part of compensation in this context requires a balancing of two opposing factors—the benefit of a lower capital issuance cost versus a higher compensation cost as a result of the discount that an employee places on options because of an undiversified position.
- DOI
- 10.1016/j.jcorpfin.2005.06.002
- Volume
- 12
- Issue
- 2
- Pages
- 367-379
- Language
- en
- Sources
- bibtex:phds-export.bib openalex crossref