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Executive Stock Options: Early Exercise Provisions and Risk‐taking Incentives
Author(s) -
BRISLEY NEIL
Publication year - 2006
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/j.1540-6261.2006.01064.x
Subject(s) - vesting , stock options , incentive , non qualified stock option , business , executive compensation , restricted stock , stock (firearms) , stock price , actuarial science , finance , economics , microeconomics , engineering , visual arts , biology , mechanical engineering , art , paleontology , horse , series (stratigraphy) , stock market
Traditional executive stock option plans allow fixed numbers of options to vest peri‐odically, independent of stock price performance. Because such options may climb deep in‐the‐money long before the manager can exercise them, they can exacerbate risk aversion in project selection. Making the proportion of options that vest a gradually increasing function of the stock price can ensure that appropriate numbers of options are retained while they provide risk‐taking incentives, but are exercised once they have lost their convexity. “Progressive performance vesting” can allow the firm more efficiently to rebalance the manager's risk‐taking incentives.