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Stock Options for Undiversified Executives

55 Pages Posted: 14 Dec 2000  

Brian J. Hall

NOM Unit Head, Harvard Business School; National Bureau of Economic Research (NBER)

Kevin J. Murphy

University of Southern California - Marshall School of Business; USC Gould School of Law

Multiple version iconThere are 3 versions of this paper

Date Written: November 2001

Abstract

We employ a certainty-equivalence framework to analyze the cost, value and pay/performance sensitivity of non-tradable options held by undiversified, risk-averse executives. We derive "Executive Value" lines, the risk-adjusted analogues to Black-Scholes lines. We show that distinguishing between "executive value" and "company cost" provides insight into many issue regarding stock option practice including: executive views about Black-Scholes values; tradeoffs between options, restricted stock and cash; exercise price policies; option repricings; early exercise policies and decisions; and the length of vesting periods. It also leads to reinterpretations of both cross-sectional facts and longitudinal trends in the level of executive compensation.

Keywords: Executive Compensation, Incentives, Stock Options, Risk Aversion

JEL Classification: J33, J44, G13, G32, M12

Suggested Citation

Hall, Brian J. and Murphy, Kevin J., Stock Options for Undiversified Executives (November 2001). Harvard NOM Research Paper No. 00-05; Presented at Tuck-JFE Contemporary Corporate Governance Conference; USC FBE Working Paper No. 01-16. Available at SSRN: https://ssrn.com/abstract=252805 or http://dx.doi.org/10.2139/ssrn.252805

Brian Hall (Contact Author)

NOM Unit Head, Harvard Business School ( email )

Soldiers Field
Boston, MA 02163
United States
617-495-5062 (Phone)
617-496-4191 (Fax)

HOME PAGE: http://www.people.hbs.edu/bhall/

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Kevin J. Murphy

University of Southern California - Marshall School of Business ( email )

BRI 308, MC 0804
Los Angeles, CA 90089-0804
United States
213-740-6553 (Phone)
213-740-6650 (Fax)

USC Gould School of Law

699 Exposition Boulevard
Los Angeles, CA 90089
United States

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