New Performance-Vested Stock Option Schemes

41 Pages Posted: 29 May 2010 Last revised: 12 Nov 2012

See all articles by An Chen

An Chen

University of Ulm

Markus Pelger

Stanford University - Management Science & Engineering

Klaus Sandmann

University of Bonn - The Bonn Graduate School of Economics

Date Written: May 27, 2010

Abstract

In the present paper, we analyze two effective non-traditional performance-based stock option schemes which we call Parisian and constrained Asian executives' stock option plans. Both options have a criterion on the terminal value similar to a call option, but in addition impose a restriction on the path of the firm's assets process. Under a Parisian option scheme, the bonus of the executives becomes effective when the stock price has outperformed a certain threshold for a fixed length of time. Under the constrained Asian scheme, the executives' compensation is coupled with the average performance of the stock price. We show that the value of both ESO schemes are less sensitive to changes in risk than plain vanilla options and hence represent an alternative compensation scheme that could make exaggerated risk taking through the executives less likely.

Keywords: Executive Stock Options, Asian Options, Parisian Options

JEL Classification: G12, G13, G30

Suggested Citation

Chen, An and Pelger, Markus and Sandmann, Klaus, New Performance-Vested Stock Option Schemes (May 27, 2010). Applied Financial Economics, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1616607 or http://dx.doi.org/10.2139/ssrn.1616607

An Chen

University of Ulm ( email )

Helmholtzstrasse 20
Ulm, D-89081
Germany

HOME PAGE: http://www.uni-ulm.de/mawi/ivw/team

Markus Pelger (Contact Author)

Stanford University - Management Science & Engineering ( email )

473 Via Ortega
Stanford, CA 94305-9025
United States

Klaus Sandmann

University of Bonn - The Bonn Graduate School of Economics ( email )

Adenauerallee 24-26
Bonn, D-53113
Germany

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