Market-Adjusted Options for Executive Compensation

33 Pages Posted: 25 Apr 1996

See all articles by James Angel

James Angel

Georgetown University - Department of Finance

Douglas M. McCabe

Georgetown University - Department of Management

Date Written: April 1996

Abstract

Compensation theory implies that managers should not be rewarded or penalized for factors outside their control. However, firms do not adjust the exercise prices of executive stock options to reflect overall stock market movements which are outside the control of the manager. This results in an option that is more expensive than necessary to reward the same level of relative performance. Current accounting rules give firms a strong incentive not to adjust the prices of the options since it would result in a higher reported expense despite the lower economic cost. The cost of not adjusting the options is also calculated.

JEL Classification: G39, G32, M12

Suggested Citation

Angel, James J. and McCabe, Douglas M., Market-Adjusted Options for Executive Compensation (April 1996). Available at SSRN: https://ssrn.com/abstract=3052 or http://dx.doi.org/10.2139/ssrn.3052

James J. Angel (Contact Author)

Georgetown University - Department of Finance ( email )

McDonough School of Business
Washington, DC 20057
United States
202-687-3765 (Phone)
202-687-4031 (Fax)

Douglas M. McCabe

Georgetown University - Department of Management ( email )

3700 O Street, NW
Washington, NY 20057
United States

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