Performance-Vested Stock Options and Interest Alignment
Posted: 23 Oct 2014 Last revised: 3 Apr 2015
Abstract
This paper investigates the effects of performance-vested stock options (PVSOs) in aligning management interests and shareholder wealth. Using 4238 executive-level observations for 1383 executive directors from the largest 244 UK non-financial firms over the 1999-2004 period, we find that the use of PVSO schemes in executive compensation contracts is associated with greater interest alignment. The evidence also shows that PVSOs outperform traditional stock options (TSOs) in providing incentives. Moreover, the results suggest that difficult vesting targets negatively affect managers' choice of effort, resulting in the divergence of managers' and shareholders' interests.
Keywords: Stock options; Pay-performance sensitivity; Equity incentive
JEL Classification: G34, M41, M51, M52
Suggested Citation: Suggested Citation