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Incentives of Stock Option Based Compensation

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Author Info
Elettra Agliardi ()
Rainer Andergassen ()

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Abstract

We introduce explicitly the effort as a choice variable in a continuous time utility maximisation framework of an executive who is partly compensated with stock options. We solve the model in the case where the executive is not allowed to trade in the company’s stock but is able to achieve a partial insurance through trading in a correlated market portfolio. We define the executive’s value of the options through a certainty equivalence approach both in the case of European call options and non-standard capped stock options and study the behaviour of the reservation price as relevant parameters change. Copyright Springer Science+Business Media, Inc. 2005

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File URL: http://hdl.handle.net/10.1007/s11156-005-3177-8
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Publisher Info
Article provided by Springer in its journal Review of Quantitative Finance and Accounting.

Volume (Year): 25 (2005)
Issue (Month): 1 (August)
Pages: 21-32
Download reference. The following formats are available: HTML (with abstract), plain text (with abstract), BibTeX, RIS (EndNote, RefMan, ProCite), ReDIF
Handle: RePEc:kap:rqfnac:v:25:y:2005:i:1:p:21-32

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Web page: http://springerlink.metapress.com/link.asp?id=102990

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Related research
Keywords: incentives; executive stock options; unhedgeable risks; utility maximisation; non-standard options compensation;

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Lisa Meulbroek, 2001. "The Efficiency of Equity-Linked Compensation: Understanding the Full Cost of Awarding Executive Stock Options," Financial Management, Financial Management Association, vol. 30(2), Summer.
  2. Henderson, Vicky & Hobson, David G., 2002. "Real options with constant relative risk aversion," Journal of Economic Dynamics and Control, Elsevier, vol. 27(2), pages 329-355, December. [Downloadable!] (restricted)
  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. [Downloadable!] (restricted)
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  4. 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. [Downloadable!] (restricted)
  5. Thaleia Zariphopoulou, 2001. "A solution approach to valuation with unhedgeable risks," Finance and Stochastics, Springer, vol. 5(1), pages 61-82. [Downloadable!] (restricted)
  6. Jonathan E. Ingersoll Jr., 2002. "The Subjective and Objective Evaluation of Incentive Stock Options," Yale School of Management Working Papers ysm276, Yale School of Management. [Downloadable!]
  7. Huddart, Steven, 1994. "Employee stock options," Journal of Accounting and Economics, Elsevier, vol. 18(2), pages 207-231, September. [Downloadable!] (restricted)
  8. Detemple, Jerome & Sundaresan, Suresh, 1999. "Nontraded Asset Valuation with Portfolio Constraints: A Binomial Approach," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 12(4), pages 835-72.
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This page was last updated on 2009-11-12.

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