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The Trouble with Stock OptionsBrian J. HallNOM Unit Head, Harvard Business School; National Bureau of Economic Research (NBER) Kevin J. MurphyUniversity of Southern California - Marshall School of Business; University of Southern California - Department of Economics; USC Gould School of Law May 2003 Harvard NOM Working Paper No. 03-33 Abstract: The trouble with options is that too many options are granted to too many people. Most options are granted below the top-executive level, and options are often an inefficient way to attract, retain and motivate executives and (especially) lower-level employees. Why, then, are options so prevalent? We discuss several explanations including changes in corporate governance, reporting requirements, taxes, the bull market and managerial rent-seeking. We also offer an alternative hypothesis that we believe explains the over-use of options and several apparent puzzles: boards and managers falsely perceive stock options to be inexpensive because of accounting and cash-flow considerations.
Number of Pages in PDF File: 41 Keywords: Executive compensation, stock options, equity-based pay, CEO pay, corporate governance, executive labor markets JEL Classification: J00, J33, G34, L20 working papers seriesDate posted: June 13, 2003Suggested CitationContact Information
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