Performance-Vested Stock Options and Interest Alignment

Posted: 23 Oct 2014 Last revised: 3 Apr 2015

See all articles by Yu Flora Kuang

Yu Flora Kuang

The University of Melbourne

Bo Qin

The University of Melbourne

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

Kuang, Yu and Qin, Bo, Performance-Vested Stock Options and Interest Alignment. British Accounting Review, Vol. 41, No. 1, 2009, Available at SSRN: https://ssrn.com/abstract=2513194

Yu Kuang (Contact Author)

The University of Melbourne ( email )

Parkville, 3010
Australia

Bo Qin

The University of Melbourne ( email )

Level 7, Department of Accounting
The Spot, 198 Berkeley St.
Carlton, Victoria VIC 3053
Australia
+61383449361 (Phone)

HOME PAGE: http://www.findanexpert.unimelb.edu.au/display/person743093#tab-overview

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