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Work hard, not smart: Stock options in executive compensation

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  • Barron, John M.
  • Waddell, Glen R.

Abstract

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.

Suggested Citation

  • Barron, John M. & Waddell, Glen R., 2008. "Work hard, not smart: Stock options in executive compensation," Journal of Economic Behavior & Organization, Elsevier, vol. 66(3-4), pages 767-790, June.
  • Handle: RePEc:eee:jeborg:v:66:y:2008:i:3-4:p:767-790
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    Cited by:

    1. Adams, Nathan R. & Waddell, Glen R., 2017. "Performance and Risk Taking under Threat of Elimination," IZA Discussion Papers 10977, Institute of Labor Economics (IZA).
    2. Manika Kohli, 2018. "Impact of Ownership Type and Board Characteristics on the Pay–Performance Relationship: Evidence from India," Indian Journal of Corporate Governance, , vol. 11(1), pages 1-34, June.
    3. Oyer, Paul & Schaefer, Scott, 2005. "Accounting, Governance, and Broad-Based Stock Option Grants," Research Papers 1821r1, Stanford University, Graduate School of Business.
    4. Adams, Nathan R. & Waddell, Glen R., 2018. "Performance and risk taking under threat of elimination," Journal of Economic Behavior & Organization, Elsevier, vol. 156(C), pages 41-54.

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