This paper examines the relative incentive costs of using stock versus options in management incentive contracts that use market price as the performance measure. We establish that if the manager's effort has little or no effect on a firm's operating risk, then the cost of incentive risk is less using stock rather than options. However, this result is reversed if the manager's effort has a significant impact on the firm's operating risk.
- Employee stock options
- Executive compensation
- Incentive efficiency
ASJC Scopus subject areas
- Business, Management and Accounting(all)