Title: Option Compensation and Industry Competition
Reference Number: 1176
Publication Date: August 2007

Neal M. Stoughton
University of Calgary

Kit Pong Wong
The University of Hong Kong

Compensation policy has become one of the most important ingredients of corporate governance. In this paper we take a new look at the issue, by contrasting the use of options with that of pure stock. We do this by integrating the repricing or resetting aspect of options with that of industrial structure. We show that industry competition may play an important role in dictating which form of compensation is optimal. When aggressive competition for key professional staff is an issue, the flexibility of options may actually become a disadvantage and therefore pure stock compensation may survive as an equilibrium. Thus compensation trends can be reconciled with trends in the nature of the competitive environment.

Published in Review of Finance 13 (January 2009), pp. 147-180.

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Last modified: 09/15/2010