Governance and the Split of Options between Executive and Non-Executive Employees

We examine the determinants and consequences of the split of options between executive and non-executive employees. We find that the proportion of options granted to executives is lower the stronger is firm governance. For the sample as a whole, the relation between options and both operating income and valuation is weaker for executive options than for options to lower-level employees. Splitting the sample between weak and strong governance firms, for the weak (strong) governance firms, the relation between executive options and firm performance and valuation is weaker (stronger) relative to non-executive options. Results are robust to controls for the endogeneity of option granting choice. Taken as a whole, our results suggest that firms with relatively weak governance tend to give a larger proportion of options to executives and appear to receive relatively less benefit from those options.