Benefits of Broad-Based Option Pay

29 Pages Posted: 12 Dec 2004

See all articles by Roman Inderst

Roman Inderst

Goethe University Frankfurt

Holger M. Mueller

New York University (NYU) - Department of Finance; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)

Multiple version iconThere are 4 versions of this paper

Date Written: November 2004

Abstract

Future wage payments drive a wedge between total firm output and the output share received by the firm's owners, thus potentially distorting strategic decisions by the firm's owners such as, e.g., whether to continue the firm, sell it, or shut it down. Using an optimal contracting approach, we show that the unique optimal firm-wide employee compensation scheme from this perspective is a broad-based option plan. Broad-based option pay minimizes the firm's expected future wage payments in states of nature where the firm is only marginally profitable, thus making continuation as attractive as possible in precisely those states of nature where, e.g., a high fixed wage would lead the firm's owners to inefficiently exit.

Keywords: Broad option plans, Employee stock options

JEL Classification: J31, J33, G34

Suggested Citation

Inderst, Roman and Mueller, Holger M., Benefits of Broad-Based Option Pay (November 2004). Available at SSRN: https://ssrn.com/abstract=631050 or http://dx.doi.org/10.2139/ssrn.631050

Roman Inderst

Goethe University Frankfurt ( email )

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Holger M. Mueller (Contact Author)

New York University (NYU) - Department of Finance ( email )

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National Bureau of Economic Research (NBER) ( email )

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Centre for Economic Policy Research (CEPR)

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European Corporate Governance Institute (ECGI) ( email )

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