Optimal Exercise Prices for Executive Stock Options / Brian J. Hall, Kevin J. Murphy.

Format:

Book

Author/Creator:

Hall, Brian J.

Contributor:

National Bureau of Economic Research.

Murphy, Kevin J.

Series:

Working Paper Series (National Bureau of Economic Research) no. w7548.

NBER working paper series no. w7548

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2000.

Summary:

Although exercise prices for executive stock options can be set either below or above the grant-date market price, in practice virtually all options are granted at the money. We offer an economic rationale for this apparent puzzle, by showing that pay-to-performance incentives for risk-averse undiversified executives are typically maximized by setting exercise prices at (or near) the grant-date market price. We provide an operationally useful alternative to Black-Scholes (1973) for the purpose of both valuing executive stock options and measuring the incentives created by options. Our framework has implications not only for exercise-price policies, but also for indexed options, option repricings, exchanges of cash for stock-based compensation, and the design of bonus plans.

Notes:

Print version record

February 2000.