IS THERE AN OPTIMUM GRANT SIZE AND EXERCISE PRICE FOR INCENTIVIZING EXECUTIVES?

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Jean M. Canil, Bruce A. Rosser

DOI:10.22495/cbv6i1art1

Abstract

This study tests the Hall and Murphy (2000, 2002) propositions using a dataset wherein in-the money and out-of-the-money option grants are just as prevalent as at-the-money option grants. The choice of grant size and exercise price in determining optimal pay-performance sensitivity, reveals an over prescription of at-the-money options at the expense of in-the-money options, particularly for high risk-averse CEOs. Also, pay-performance sensitivity is found unexpectedly
negatively related to the exercise price, which is attributed to an equally unexpected inverse relation between risk aversion and grant size.

Keywords: executive compensation, CEO, corporate governance

How to cite this paper: Canil, J. M., & Rosser, B. A. (2010). Is there an optimum grant size and exercise price for incentivizing executives? Corporate Board: role, duties and composition, 6(1), 6-18. http://doi.org/10.22495/cbv6i1art1