Is There a Firm-Size Effect in CEO Stock Option Grants?

26 Pages Posted: 26 Feb 2008

See all articles by Jean Canil

Jean Canil

University of Adelaide - Business School; Financial Research Network (FIRN)

Date Written: February 24, 2008

Abstract

Schaefer (1998) and Baker and Hall (2004) posit a firm size effect for regular executive compensation but not specifically for executive stock option grants. They propose an inverse relation between pay-performance sensitivity and firm size along with a positive relation between the marginal productivity of executive effort and firm size. The product of pay-performance sensitivity and executive productivity is 'incentive strength'. They find a weakly positive association between incentive strength and firm size. We substitute Hall and Murphy's (2002) pay-performance sensitivity metric to detect a firm size effect in CEO stock option grants. After adjusting for small-firm risk aversion and private diversification 'clienteles', we document evidence of a residual small-firm effect impacting on incentive strength principally through grant size. Given lower small-firm deltas, grant size appears to have been increased by compensation committees to ensure small-firm CEOs are not under-compensated relative to their large-firm counterparts. We also find that firm complexity influences pay-performance sensitivity as well, but not labor productivity (proxying for CEO productivity). No evidence is found that firm smallness and complexity impact on labor productivity. However, we empirically confirm a negative relation between pay-performance sensitivity and firm smallness and, by implication, firm complexity.

Keywords: executive stock options, pay-performance sensitivity, firm size

JEL Classification: G390

Suggested Citation

Canil, Jean, Is There a Firm-Size Effect in CEO Stock Option Grants? (February 24, 2008). Available at SSRN: https://ssrn.com/abstract=1097396 or http://dx.doi.org/10.2139/ssrn.1097396

Jean Canil (Contact Author)

University of Adelaide - Business School ( email )

10 Pulteney Street
Adelaide, South Australia 5005
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

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