Underwater options and the dynamics of executive pay-to-performance sensitivities

• 成果类型: Article
• 署名作者: Hall, BJ; Knox, TA
• 署名单位: Harvard University; National Bureau of Economic Research; University of Chicago
• 刊物名称: JOURNAL OF ACCOUNTING RESEARCH
• ISSN/ISSBN: 0021-8456
• DOI: 10.1111/j.1475-679X.2004.00142.x
• 发表日期: 2004
• 页码: 365-412
• 关键词: EMPLOYEE STOCK-OPTIONS; equity premium; OPTIMAL EXERCISE; COMPENSATION; RISK; diversification; constraints; valuation; plans; cost

摘要

We empirically analyze the dynamics of executives pay-to-performance sensitivities. Option pay-to-performance sensitivities become weaker as options fall underwater, often leading to pressures to reprice options or restore pay-to-performance sensitivity in other ways. Building a detailed data set on executives' portfolios of stock and options, we find that the responsiveness of pay-to-performance sensitivities (created by all executive holdings of stock and options) to changes in stock price is large. The elasticity of pay-to-performance sensitivities with respect to stock price decreases is about 0.7 and is larger for high-option executives and for executives with high percentages of options already underwater. The dominant mechanism through which companies offset declines in option pay-to-performance sensitivities is larger option grants following stock price declines; on average, these larger grants restore approximately 40% of the stock-price-induced pay-to-performance sensitivity declines. Option repricings are inconsequential in this regard, despite the attention they have attracted. In looking at positive returns, we find the reverse: higher returns both directly increase pay-to-performance sensitivities and lead to larger option grants, which raise pay-to-performance sensitivities further. Thus, option grants to executives tend to be largest following large stock price increases or large stock price decreases.