This paper examines the optimal equity compensation for executives. When executives choose a level of effort to devote to gathering information and a criterion for acting on the information gathered, the optimal exercise price involves a trade-off; a higher exercise price moves the executive's decision criterion away from first-best but provides leverage that moves the executive's effort toward first-best. This trade-off depends on a variety of factors, including the potential influence of decisions on firm value. We document empirical regularities consistent with the theory such as that options are relatively less prevalent in the equity compensation of more-senior executives.
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Volume (Year): 66 (2008) Issue (Month): 3-4 (June) Pages: 767-790 Download reference. The following formats are available: HTML
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