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New performance-vested stock option schemes

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  • An Chen
  • Markus Pelger
  • Klaus Sandmann

Abstract

In the present article, we analyse two effective nontraditional performance-based stock option schemes which we call Parisian and constrained Asian executives' stock option plans. Both options have a criterion on the terminal value similar to a call option, but in addition impose a restriction on the path of the firm's assets process. Under a Parisian option scheme, the bonus of the executives becomes effective when the stock price has outperformed a certain threshold for a fixed length of time. Under the constrained Asian scheme, the executives' compensation is coupled with the average performance of the stock price. We show that the value of both Executives' Stock Option (ESO) schemes are less sensitive to changes in risk than plain vanilla options and hence represent an alternative compensation scheme that could make exaggerated risk taking through the executives less likely.

Suggested Citation

  • An Chen & Markus Pelger & Klaus Sandmann, 2013. "New performance-vested stock option schemes," Applied Financial Economics, Taylor & Francis Journals, vol. 23(8), pages 709-727, April.
    • Handle: RePEc:taf:apfiec:v:23:y:2013:i:8:p:709-727
    DOI: 10.1080/09603107.2012.750448
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    Cited by:

    1. Yangyang Zhuang & Pan Tang, 2023. "Pricing of American Parisian option as executive option based on the least‐squares Monte Carlo approach," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 43(10), pages 1469-1496, October.

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