The Adoption and Characteristics of Performance Stock Option Grants

55 Pages Posted: 20 Apr 2005

See all articles by Joseph Gerakos

Joseph Gerakos

Tuck School of Business at Dartmouth College; Dartmouth College - Tuck School of Business

Theodore H. Goodman

Purdue University - Department of Accounting

Christopher D. Ittner

University of Pennsylvania - Accounting Department

David F. Larcker

Stanford University - Graduate School of Business

Date Written: April 2005

Abstract

Traditional executive stock options are granted at fair market value on the grant date and vest over time. Although executive stock options are a popular compensation vehicle, they have received increasing criticism for providing inadequate incentives for executives to improve shareholder wealth. Critics of traditional options, together with a growing body of theoretical studies, call for the use of performance options that link option vesting or exercise to the achievement of performance targets. We examine the factors influencing the adoption and characteristics of performance (i.e., premium-priced and performance-vested) stock option grants to CEOs. We find some evidence that the characteristics of performance option grants (but not their adoption) are associated with the economic determinants identified in theoretical studies. However, many of the associations are opposite the predictions from the theoretical studies. We find stronger evidence that performance options are associated with exceptionally large option grants to CEOs of firms with weak governance structures and large pension fund holdings. Overall, our results are most consistent with the explanation that performance option grants are used to minimize criticism of controversial compensation decisions.

Keywords: Stock options, premium stock options, performance-based vesting

JEL Classification: J33, M52, G34

Suggested Citation

Gerakos, Joseph and Goodman, Theodore H. and Ittner, Christopher D. and Larcker, David F., The Adoption and Characteristics of Performance Stock Option Grants (April 2005). Available at SSRN: https://ssrn.com/abstract=701481 or http://dx.doi.org/10.2139/ssrn.701481

Joseph Gerakos

Tuck School of Business at Dartmouth College ( email )

Hanover, NH 03755
United States

Dartmouth College - Tuck School of Business ( email )

Hanover, NH 03755
United States

Theodore H. Goodman

Purdue University - Department of Accounting ( email )

Krannert School of Management
West Lafayette, IN 47907-1310
United States

Christopher D. Ittner

University of Pennsylvania - Accounting Department ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States
215-898-7786 (Phone)
215-573-2054 (Fax)

David F. Larcker (Contact Author)

Stanford University - Graduate School of Business ( email )

Graduate School of Business
518 Memorial Way
Stanford, CA 94305-5015
United States
650-725-6159 (Phone)

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