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Executive Stock Options: Early Exercise Provisions and Risk-taking Incentives

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  • NEIL BRISLEY

Abstract

Traditional executive stock option plans allow fixed numbers of options to vest peri-odically, independent of stock price performance. Because such options may climb deep in-the-money long before the manager can exercise them, they can exacerbate risk aversion in project selection. Making the proportion of options that vest a gradually increasing function of the stock price can ensure that appropriate numbers of options are retained while they provide risk-taking incentives, but are exercised once they have lost their convexity. "Progressive performance vesting" can allow the firm more efficiently to rebalance the manager's risk-taking incentives. Copyright 2006 by The American Finance Association.

Suggested Citation

  • Neil Brisley, 2006. "Executive Stock Options: Early Exercise Provisions and Risk-taking Incentives," Journal of Finance, American Finance Association, vol. 61(5), pages 2487-2509, October.
  • Handle: RePEc:bla:jfinan:v:61:y:2006:i:5:p:2487-2509
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    Cited by:

    1. Strebulaev, Ilya A. & Whited, Toni M., 2012. "Dynamic Models and Structural Estimation in Corporate Finance," Foundations and Trends(R) in Finance, now publishers, vol. 6(1–2), pages 1-163, November.
    2. Alex Edmans & Xavier Gabaix & Tomasz Sadzik & Yuliy Sannikov, 2009. "Dynamic Incentive Accounts," NBER Working Papers 15324, National Bureau of Economic Research, Inc.
    3. Kim, E. Han & Lu, Yao, 2011. "CEO ownership, external governance, and risk-taking," Journal of Financial Economics, Elsevier, vol. 102(2), pages 272-292.
    4. Alex Edmans & Vivian W. Fang & Katharina A. Lewellen, 2013. "Equity Vesting and Managerial Myopia," NBER Working Papers 19407, National Bureau of Economic Research, Inc.
    5. João Paulo Vieito & António Cerqueira & Elísio Brandão & Walayet A. Khan, 2009. "Executive Compensation: the Finance Perspective," Portuguese Journal of Management Studies, ISEG, Universidade de Lisboa, vol. 0(1), pages 3-32.
    6. Hoffmann Arvid O.I. & Pennings Joost M.E., 2008. "Shareholder Activism and the Role of Marketing: A Framework for Analyzing and Managing Investor Relations," Research Memorandum 007, Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR).
    7. repec:hrv:faseco:34651704 is not listed on IDEAS
    8. Alex Edmans & Xavier Gabaix, 2016. "Executive Compensation: A Modern Primer," Journal of Economic Literature, American Economic Association, vol. 54(4), pages 1232-1287, December.
    9. Shahbaz Sheikh, 2012. "Do CEO compensation incentives affect firm innovation?," Review of Accounting and Finance, Emerald Group Publishing, vol. 11(1), pages 4-39, February.
    10. Azi Ben-Rephael & Jacob Oded & Avi Wohl, 2014. "Do Firms Buy Their Stock at Bargain Prices? Evidence from Actual Stock Repurchase Disclosures," Review of Finance, European Finance Association, vol. 18(4), pages 1299-1340.
    11. Tang, Chun-Hua, 2012. "Revisiting the incentive effects of executive stock options," Journal of Banking & Finance, Elsevier, vol. 36(2), pages 564-574.
    12. Laux, Volker, 2012. "Stock option vesting conditions, CEO turnover, and myopic investment," Journal of Financial Economics, Elsevier, vol. 106(3), pages 513-526.
    13. Fang, Hongyan & Nofsinger, John R. & Quan, Juan, 2015. "The effects of employee stock option plans on operating performance in Chinese firms," Journal of Banking & Finance, Elsevier, vol. 54(C), pages 141-159.
    14. Kini, Omesh & Williams, Ryan, 2012. "Tournament incentives, firm risk, and corporate policies," Journal of Financial Economics, Elsevier, vol. 103(2), pages 350-376.
    15. Pinto, Helena & Widdicks, Martin, 2014. "Do compensation plans with performance targets provide better incentives?," Journal of Corporate Finance, Elsevier, vol. 29(C), pages 662-694.
    16. Hoffmann, Florian & Inderst, Roman & Opp, Marcus, 2014. "Regulating Deferred Incentive Pay," CEPR Discussion Papers 9877, C.E.P.R. Discussion Papers.
    17. Olaf Korn & Clemens Paschke & Marliese Uhrig-Homburg, 2012. "Robust stock option plans," Review of Quantitative Finance and Accounting, Springer, vol. 39(1), pages 77-103, July.
    18. Simona Catuogno & Sara Saggese & Fabrizia Sarto & Riccardo Viganò, 2016. "Shedding light on the aim of stock options: a literature review," Journal of Management & Governance, Springer;Accademia Italiana di Economia Aziendale (AIDEA), vol. 20(2), pages 387-411, June.

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