Stock Options and Managerial Optimal Contracts

ASU Economics Working Paper No. 12/2001

32 Pages Posted: 27 Jul 2001

See all articles by Manuel Santos

Manuel Santos

Arizona State University (ASU) - Economics Department

Jorge Aseff

Date Written: February 2001

Abstract

In this paper we are concerned with the performance of stock option contracts in the provision of managerial incentives. In our simple framework, we restrict the space of contracts available to the principal to those conformed by a fixed payment and a package of call options on the firm's stock. We then offer a characterization of optimal stock option compensation schemes. As compared to the fixed payment and the option grant, we find that the strike price plays an intermediate role in the provision of insurance and incentives. We also develop some efficient algorithms for the computation of optimal contracts in which the observable outcome is drawn from a continuous distribution. These algorithms are useful to address some important issues such as the calibration of a principal-agent model, the degree of risk aversion compatible with current compensation schemes, and the performance of stock option contracts.

Keywords: stock option, managerial optimal contracts

JEL Classification: G3, J3

Suggested Citation

Santos, Manuel and Aseff, Jorge G., Stock Options and Managerial Optimal Contracts (February 2001). ASU Economics Working Paper No. 12/2001. Available at SSRN: https://ssrn.com/abstract=275977 or http://dx.doi.org/10.2139/ssrn.275977

Manuel Santos (Contact Author)

Arizona State University (ASU) - Economics Department ( email )

Tempe, AZ 85287-3806
United States
(480) 965-0748 (Phone)

No contact information is available for Jorge G. Aseff

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