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Incentive Effects of Performance-Vested Stock Options

Yu Flora Kuang

VU University Amsterdam

Jeroen Suijs

Tilburg University - Tilburg School of Economics and Management

July 13, 2006

This paper assesses the incentive effects of stock options that link vesting to firm performance. It is shown that performance-vested stock options induce higher managerial effort than traditional stock options (i.e. stock options that vest unconditionally) when performance targets are not too difficult. Furthermore, the principal is strictly better off when using performance-vested stock options. When performance targets reside at the optimal level, analysis indicates an above 70% vesting probability, echoing the consensus in the goal-setting literature that states that tight, but achievable targets are associated with performance benefits.

Number of Pages in PDF File: 39

JEL Classification: J33, G34

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Date posted: July 17, 2006 ; Last revised: September 25, 2011

Suggested Citation

Kuang, Yu Flora and Suijs, Jeroen, Incentive Effects of Performance-Vested Stock Options (July 13, 2006). Available at SSRN: http://ssrn.com/abstract=917062 or http://dx.doi.org/10.2139/ssrn.917062

Contact Information

Yu Kuang
VU University Amsterdam ( email )
Faculty of Economics and Business Administration
De Boelelaan 1105
Amsterdam, 1081 HV
+31(0)20 598 3762 (Phone)
Jeroen Suijs (Contact Author)
Tilburg University - Tilburg School of Economics and Management ( email )
P.O. Box 90153
Tilburg, 5000 LE
Feedback to SSRN

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References:  39
Citations:  5

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