Option Repricing and Incentive Realignment
47 Pages Posted: 9 Feb 2004
Date Written: January 4, 2004
We provide evidence that firms reprice out-of-the-money executive stock options in order to realign managerial incentives. A sharp decline in stock price, by reducing the sensitivity of executive pay to firm performance (delta) and, in many cases, increasing sensitivity of executive pay to stock-return volatility (vega), can cause managerial incentives to depart from optimal or target levels. Our results suggest that increasing delta does not appear to be a strong motivation for repricing. Rather, we find strong evidence that firms reprice executive options to reduce risk-taking incentives (vega) toward the target level.
Keywords: Option, repricing, incentive, compensation, vega, delta
JEL Classification: G34, J33
Suggested Citation: Suggested Citation