Option Compensation and Industry Competition
Review of Finance, 2008
39 Pages Posted: 12 May 2003 Last revised: 21 Mar 2008
Compensation policy has become one of the most important ingredients of corporate governance. In this paper we take a new look at the issue, by contrasting the use of options with that of stock. We do this by integrating the repricing or resetting aspect of options with that of industrial structure. We show that industry competition may play an important role in dictating which form of compensation is optimal. When aggressive competition for key professional staff is an issue, the flexibility of options may actually become a disadvantage and therefore pure stock compensation may survive as an equilibrium. Thus compensation trends may be partly explained by trends in the nature of the competitive environment.
Keywords: Compensation, options, stock, product markets, competition, employees
JEL Classification: G30, D21, D43
Suggested Citation: Suggested Citation