Resource title

Executive stock options: early exercise provisions and risk-taking incentives

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Resource description

Traditional executive stock option plans vest gradually over a period of several years and may climb deep In-The-Money long before the manager is allowed to exercise them. The author analyses the risk-takingincentives this may create and show when these may become counter-productive. He shows how vesting can be used to efficiently re-optimise incentives and he derives optimal vesting schedules as a function of stock price gains. When firms face risky-but-profitable Growth Opportunities he finds that they should allow more options to vest the deeper they move In-The-Money, a result he terms ‘Progressive’ Performance Vesting. The author examines the implications for commonly observed option schemes and makes normative predictions as to the design and improvement of effective Executive Stock Option compensation plans.

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Resource language

en

Resource content type

application/pdf

Resource resource URL

http://flora.insead.edu/fichiersti_wp/inseadwp2001/2001-90.pdf

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Copyright INSEAD. All rights reserved