Incentive Effects of Performance-Vested Stock Options

39 Pages Posted: 17 Jul 2006 Last revised: 25 Sep 2011

Yu Flora Kuang

The University of Melbourne

Jeroen Suijs

Tilburg University - Tilburg School of Economics and Management

Date Written: July 13, 2006

Abstract

This paper assesses the incentive effects of stock options that link vesting to firm performance. It is shown that performance-vested stock options induce higher managerial effort than traditional stock options (i.e. stock options that vest unconditionally) when performance targets are not too difficult. Furthermore, the principal is strictly better off when using performance-vested stock options. When performance targets reside at the optimal level, analysis indicates an above 70% vesting probability, echoing the consensus in the goal-setting literature that states that tight, but achievable targets are associated with performance benefits.

JEL Classification: J33, G34

Suggested Citation

Kuang, Yu Flora and Suijs, Jeroen, Incentive Effects of Performance-Vested Stock Options (July 13, 2006). Available at SSRN: https://ssrn.com/abstract=917062 or http://dx.doi.org/10.2139/ssrn.917062

Yu Kuang

The University of Melbourne ( email )

Level 7, The Spot
198 Berkeley St
Carlton, Victoria 3053
Australia
+61383449361 (Phone)
+61393492397 (Fax)

Jeroen Suijs (Contact Author)

Tilburg University - Tilburg School of Economics and Management ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

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