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The Tradeoff Between Compensation and Incentives in Executive Stock Options

Author

Listed:
  • Don M. Chance

    (Department of Finance, 2163 CEBA, Louisiana State University, Baton Rouge, LA 70803, USA)

  • Tung-Hsiao Yang

    (Department of Finance, 2163 CEBA, Louisiana State University, Baton Rouge, LA 70803, USA)

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.

Suggested Citation

  • Don M. Chance & Tung-Hsiao Yang, 2011. "The Tradeoff Between Compensation and Incentives in Executive Stock Options," Quarterly Journal of Finance (QJF), World Scientific Publishing Co. Pte. Ltd., vol. 1(04), pages 733-766.
    • Handle: RePEc:wsi:qjfxxx:v:01:y:2011:i:04:n:s2010139211000225
    DOI: 10.1142/S2010139211000225
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    References listed on IDEAS

    as
    1. Scott Weisbenner, 2000. "Corporate share repurchases in the 1990s: what role do stock options play?," Finance and Economics Discussion Series 2000-29, Board of Governors of the Federal Reserve System (U.S.).
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Executive stock options; stock options; executive compensation; incentives; G32; G39; M52;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G39 - Financial Economics - - Corporate Finance and Governance - - - Other
    • M52 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects

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