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Performance Regularity: A New Class of Executive Compensation Packages

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  • Carole Bernard

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  • Olivier Le Courtois

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    Abstract

    The ability of standard executive stock options to incite managers to adequately select the assets of their firm has been extensively questioned by academics and practitioners. However, very few alternatives exist or have been proposed to better control the investment strategies of top managers. The present article studies the evaluation and sensitivity of a new class of executive stock options well designed for the control of managers. Such packages are aimed at giving incentives to CEOs to maintain a regular performance over time and a stable volatility level. The importance and implications of the choice of the different parameters as well as their robustness with respect to standard financial criteria are examined. In brief, this article studies in a utility-based framework a new type of executive stock options that can be useful to protect and enhance the economic performance of corporations. Copyright Springer Science+Business Media, LLC. 2012

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    File URL: http://hdl.handle.net/10.1007/s10690-012-9153-0
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    Bibliographic Info

    Article provided by Springer in its journal Asia-Pacific Financial Markets.

    Volume (Year): 19 (2012)
    Issue (Month): 4 (November)
    Pages: 353-370

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    Handle: RePEc:kap:apfinm:v:19:y:2012:i:4:p:353-370

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    Web page: http://springerlink.metapress.com/link.asp?id=102851

    Related research

    Keywords: Executive stock options; Parisian options; Volatility;

    References

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    1. Chance, Don M., 2009. "Liquidity and employee options: An empirical examination of the Microsoft experience," Journal of Corporate Finance, Elsevier, vol. 15(4), pages 469-487, September.
    2. Carole Bernard & Phelim Boyle, 2011. "Monte Carlo methods for pricing discrete Parisian options," The European Journal of Finance, Taylor & Francis Journals, vol. 17(3), pages 169-196.
    3. Brian J. Hall & Kevin J. Murphy, 2000. "Optimal Exercise Prices for Executive Stock Options," NBER Working Papers 7548, National Bureau of Economic Research, Inc.
    4. Hall, Brian J. & Murphy, Kevin J., 2002. "Stock options for undiversified executives," Journal of Accounting and Economics, Elsevier, vol. 33(1), pages 3-42, February.
    5. Barsky, Robert B, et al, 1997. "Preference Parameters and Behavioral Heterogeneity: An Experimental Approach in the Health and Retirement Study," The Quarterly Journal of Economics, MIT Press, vol. 112(2), pages 537-79, May.
    6. Robert C. Merton, 1973. "Theory of Rational Option Pricing," Bell Journal of Economics, The RAND Corporation, vol. 4(1), pages 141-183, Spring.
    7. Johnson, Shane A. & Tian, Yisong S., 2000. "The value and incentive effects of nontraditional executive stock option plans," Journal of Financial Economics, Elsevier, vol. 57(1), pages 3-34, July.
    8. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-54, May-June.
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