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Option Compensation and Industry Competition

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  • Neal M. Stoughton
  • Kit Pong Wong

Abstract

Compensation policy has become one of the most important ingredients of corporate governance. In this paper we take a new look at the issue, by contrasting the use of options with that of stock. We do this by integrating the repricing or resetting aspect of options with that of industrial structure. We show that industry competition may play an important role in dictating which form of compensation is optimal. When aggressive competition for key professional staff is an issue, the flexibility of options may actually become a disadvantage and therefore pure stock compensation may survive as an equilibrium. Thus compensation trends may be partly explained by trends in the nature of the competitive environment. Copyright 2009, Oxford University Press.

Suggested Citation

  • Neal M. Stoughton & Kit Pong Wong, 2009. "Option Compensation and Industry Competition," Review of Finance, European Finance Association, vol. 13(1), pages 147-180.
    • Handle: RePEc:oup:revfin:v:13:y:2009:i:1:p:147-180
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    File URL: http://hdl.handle.net/10.1093/rof/rfn001
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    Cited by:

    1. Kanagaretnam, Kiridaran & Sarkar, Sudipto, 2011. "Managerial compensation and the underinvestment problem," Economic Modelling, Elsevier, vol. 28(1), pages 308-315.
    2. Bakke, Tor-Erik & Feng, Felix Zhiyu & Mahmudi, Hamed & Zhu, Caroline H., 2022. "Foreign competition and CEO risk-incentive compensation," Journal of Corporate Finance, Elsevier, vol. 76(C).

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