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The Hybrid Option: A New Approach to Equity Compensation


  • Marc Hodak


Equity compensation can provide part of the expected reward needed to attract and retain talent while strengthening the unity of interest between management and its shareholders. But more can be done. Until now, managers and boards have used standard equity instruments such as restricted common stock and at-the-money stock options. Boards typically place various restrictions on these instruments to improve retention or alignment, or mix and match them according to taste or fashion. But each of these standard instruments has well-understood limitations. For example, employee stock options that are granted at the money are worth considerably less, on the day of the grant, to the managers that receive them than to the shareholders of the companies that give them. And the values of both options and restricted stock depend heavily on variables, like the general state of the economy, that have little or nothing to do with managerial performance. Copyright Copyright (c) 2009 Morgan Stanley.

Suggested Citation

  • Marc Hodak, 2009. "The Hybrid Option: A New Approach to Equity Compensation," Journal of Applied Corporate Finance, Morgan Stanley, vol. 21(2), pages 93-99.
  • Handle: RePEc:bla:jacrfn:v:21:y:2009:i:2:p:93-99

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    References listed on IDEAS

    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. Morck, Randall & Shleifer, Andrei & Vishny, Robert W., 1988. "Management ownership and market valuation," Scholarly Articles 29407535, Harvard University Department of Economics.
    3. McConnell, John J. & Servaes, Henri, 1990. "Additional evidence on equity ownership and corporate value," Journal of Financial Economics, Elsevier, vol. 27(2), pages 595-612, October.
    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.
    5. Morck, Randall & Shleifer, Andrei & Vishny, Robert W., 1988. "Management ownership and market valuation : An empirical analysis," Journal of Financial Economics, Elsevier, vol. 20(1-2), pages 293-315, January.
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