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Asian Review of Financial Research, Vol., No..
pp.331~358
pp.331~358
On Incentives of Executive Stock Options
Kwangil Bae Graduate School of Finance and Accounting at KAIST
Jangkoo Kang Graduate School of Finance and Accounting at KAIST
Hwa-Sung Kim College of Business Administration at Kyung Hee University
In the setting of Hall and Murphy (2000, 2002), we can observe that the executive¡¯s incentives to increase the stock price can be very low on some ranges of the stock price. So we propose a new stock option compensation scheme whose payoffs are concave with respect to the stock price when the stock price at option¡¯s maturity exceeds the strike price. This kind of options allows the executive to have greater incentives compared with the traditional option model. Hall and Murphy (2000, 2002) also analyze the incentive effects only on the grant date of the options. We find that the incentives at some time (after the grant date) might not be optimal even though the firm chose the moneyness of the option that gave the executive the optimal incentives on the grant date.
Kwangil Bae
Jangkoo Kang
Hwa-Sung Kim
In the setting of Hall and Murphy (2000, 2002), we can observe that the executive¡¯s incentives to increase the stock price can be very low on some ranges of the stock price. So we propose a new stock option compensation scheme whose payoffs are concave with respect to the stock price when the stock price at option¡¯s maturity exceeds the strike price. This kind of options allows the executive to have greater incentives compared with the traditional option model. Hall and Murphy (2000, 2002) also analyze the incentive effects only on the grant date of the options. We find that the incentives at some time (after the grant date) might not be optimal even though the firm chose the moneyness of the option that gave the executive the optimal incentives on the grant date.
Executive values,Incentive Effects,At the money options,Concave payoffs
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