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Article
Publication date: 20 February 2009

Yan Wendy Wu

This paper seeks to evaluate the cost of repriceable options, and to investigate whether repriceable employee stock options (ESOs) cost more than standard ESOs in providing…

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Abstract

Purpose

This paper seeks to evaluate the cost of repriceable options, and to investigate whether repriceable employee stock options (ESOs) cost more than standard ESOs in providing incentives to employees.

Design/methodology/approach

This paper develops an intensity‐based model, reflecting the special features of repriceable ESOs. The model is used to assess shareholder cost of repriceable ESOs, to explore their early exercise pattern and to compare their incentive effect with standard ESOs.

Findings

Two main conclusions arise. First, option holders of repriceable ESOs postpone their exercise before repricing. But, once the exercise price has been reset, option holders are more likely to exercise ESOs early. Second, option repricing is less cost‐effective than standard options in providing incentives.

Practical implications

This research finds that issuing new options proves more efficient than option repricing in providing incentives. In turn, this research offers a practical guideline to companies confronted with underwater options.

Originality/value

Constructing and applying a more accurate valuation model than those previously developed, this paper investigates several important questions about ESOs repricing. Chiefly, this research helps academics and practitioners better understand the cost of repriceable options, how repricing influences employees’ early exercise decisions, and whether option repricing is cost‐effective in providing incentives. These are important questions to ask, filling gaps in the existing literature.

Details

Review of Accounting and Finance, vol. 8 no. 1
Type: Research Article
ISSN: 1475-7702

Keywords

Article
Publication date: 9 May 2013

Atul Gupta

Firms will, at times, replace employee holdings of out‐of‐the‐money stock options with new ones that have lower exercise prices. This paper seeks to examine how stockholders view…

Abstract

Purpose

Firms will, at times, replace employee holdings of out‐of‐the‐money stock options with new ones that have lower exercise prices. This paper seeks to examine how stockholders view such actions.

Design/methodology/approach

The stock price reaction to announcements of option exchange programs is used to establish how stockholders view option exchanges. Regression analysis is then used to get insight into firm and program characteristics that explain cross‐sectional differences in the stock price response.

Findings

A positive stock price response indicates that stockholders view such option exchanges as value enhancing. Regression analysis indicates that the price response increases with a firm's growth opportunities, the level of employee turnover, the extent to which employee option holdings are out‐of‐the‐money, and the quality of corporate governance. Deals where only non‐executive employees are allowed to participate are viewed more favourably.

Originality/value

This is the first paper to document that stockholders regard resetting the terms of employee option holdings in a positive vein, confirming implications emerging from theoretical papers on this subject. The paper also documents firm and program characteristics that impact the extent of possible value creation.

Details

Review of Accounting and Finance, vol. 12 no. 2
Type: Research Article
ISSN: 1475-7702

Keywords

Article
Publication date: 14 November 2016

Sandra Renfro Callaghan, Chandra Subramaniam and Stuart Youngblood

This paper aims to directly test the assertion by proponents of executive stock option repricing that repricing leads to increased management retention. Previous studies find…

Abstract

Purpose

This paper aims to directly test the assertion by proponents of executive stock option repricing that repricing leads to increased management retention. Previous studies find either no effect or decreased retention following stock price repricing. This paper uses a more precise research design to re-examine the relationship between stock option retention and management retention.

Design/methodology/approach

The authors use an empirical methodology and construct a sample of 158 firms and 201 repricing events, and a control sample of 201 non-repricing firms. They then examine executive turnover in the four years following the stock option repricing event.

Findings

It was found that, consistent with agency theory, stock option repricing actually results in greater executive retention. Specifically, CEO retention is significantly greater for repricing firms relative to non-repricing firms for up to three years following the repricing date, and non-CEO executive retention is significantly greater for two years.

Research limitations/implications

Firms continue to restructure management through stock option repricing. However, recent option repricing has been undertaken during a period when the economy is in decline, making it is difficult to disentangle effects of option repricing on management retention. Hence, this paper uses repricing data from an earlier period, from 1992-1997, when the economy was good.

Originality/value

Many firms argue that when stock options are out-of-the-money and managerial talent is in demand, repricing executive stock options is necessary to retain managers. Previous studies find contradictory or no support for this view. Using a much more precise methodology, this paper shows that firms do retain managers when they reprice their options compared to when they do not.

Details

Review of Accounting and Finance, vol. 15 no. 4
Type: Research Article
ISSN: 1475-7702

Keywords

Article
Publication date: 1 June 2005

Dan R. Dalton and Catherine M. Dalton

Looks at the issue of repricing stock options for CEOs and other senior managers when existing option are under water. The board of directors has the option of exchanging existing

745

Abstract

Purpose

Looks at the issue of repricing stock options for CEOs and other senior managers when existing option are under water. The board of directors has the option of exchanging existing options (i.e. the underwater options) for new options with a lower exercise price.

Design/methodology/approach

Opinion piece.

Findings

There is no evidence that repricing reduces CEO or top management turnover. In fact, top executives left a firm at a much higher rate than their counterparts in firms that did not reprice. Moreover, whether relying on accounting returns (ROA) or market returns (returns on common stock), there is no evidence that repricing firms perform better after the repricing.

Practical implications

Provides boards and senior managers with information with information showing that repricing of options is almost never justified except possibly when hiring a new CEO.

Originality/value

Of particular value to CEOs and other board members

Details

Journal of Business Strategy, vol. 26 no. 3
Type: Research Article
ISSN: 0275-6668

Keywords

Article
Publication date: 1 January 2003

Catherine M. Daily and Dan R. Dalton

Are they an effective executive retention strategy? Studies say no.

Abstract

Are they an effective executive retention strategy? Studies say no.

Details

Handbook of Business Strategy, vol. 4 no. 1
Type: Research Article
ISSN: 1077-5730

Article
Publication date: 1 July 2005

Bartolomé Dey´‐Tortella, Luis R. Gomez‐Mejía, Julio O. de Castro and Robert M. Wiseman

Agency theoretic models have been used in the past to justify the use of stock options as an effective incentive alignment mechanism to create a common fate between principals and…

956

Abstract

Agency theoretic models have been used in the past to justify the use of stock options as an effective incentive alignment mechanism to create a common fate between principals and agents. In this paper, we use behavioral theory to reach the opposite conclusion – namely, that the design characteristics of the typical stock option plan foster perverse incentives for loss‐averse agents, leading to decisions with detrimental consequences for principals. We also consider alternative stock option designs and other equity‐based executive compensation plans and argue that they may suffer from the same problems as traditional stock option plans – namely, that loss‐averse executives will try to protect the endowed value of that equity through self‐serving decisions that do not enhance shareholder wealth.

Details

Management Research: Journal of the Iberoamerican Academy of Management, vol. 3 no. 2
Type: Research Article
ISSN: 1536-5433

Keywords

Article
Publication date: 30 September 2014

Steven Balsam, Il-woon Kim, David Ryan and Hakjoon Song

The purpose of this paper is to examine the motivations for and variations in terms of stock option modifications under Statement of Financial Accounting Standards (SFAS) 123(R)…

Abstract

Purpose

The purpose of this paper is to examine the motivations for and variations in terms of stock option modifications under Statement of Financial Accounting Standards (SFAS) 123(R). Stock options are used to motivate and retain employees. Unfortunately, when stock prices decline, existing options lose their incentive value. In response, firms look for ways to re-incentivize their employees. Their choices include issuing additional options and/or modifying existing grants.

Design/methodology/approach

We investigate the economic determinants of stock option modification post SFAS 123(R), such as financial reporting cost, shareholder/political cost and employee incentive and retention. Our analysis is based on 67 sample firms that modify their stock option plans from 2005 to 2008 and 67 control firms constructed based on size, industry, year and stock price performance for the prior five years.

Findings

The results show that loss firms are more likely to modify their options, which supports the argument that financial reporting costs influence the decision to modify. We find support for the shareholder/political costs hypothesis, as the overhang ratio is positively associated with the decision to modify. However, we find no evidence that modifications substitute for additional option grants. We find that politically sensitive larger firms are more likely to incorporate more shareholder friendly measures such as excluding executives from modification or providing shareholders the opportunity to vote on modification.

Originality/value

This is the first paper examining the economic determinants of stock option modification under SFAS 123(R). Our findings provide some insights regarding economic determinants of SFAS 123(R) for accounting policy-makers and investors.

Details

Journal of Financial Reporting and Accounting, vol. 12 no. 2
Type: Research Article
ISSN: 1985-2517

Keywords

Article
Publication date: 1 April 2002

Catherine M. Daily and Dan R. Dalton

A close look at a number of studies reveals that equity compensation is not a prescription for performance.

Abstract

A close look at a number of studies reveals that equity compensation is not a prescription for performance.

Details

Journal of Business Strategy, vol. 23 no. 4
Type: Research Article
ISSN: 0275-6668

Abstract

Details

Corporate Fraud Exposed
Type: Book
ISBN: 978-1-78973-418-8

Book part
Publication date: 19 May 2010

Theresa F. Henry

In late 2008, a crisis of unprecedented proportion unfolded on Wall Street that called for the government bailout of institutions. Although the crisis wreaked havoc on the lives…

Abstract

In late 2008, a crisis of unprecedented proportion unfolded on Wall Street that called for the government bailout of institutions. Although the crisis wreaked havoc on the lives of firm stakeholders and taxpayers, many of the executives of these rescued firms received bonus compensation as the year closed, which called into question the relationship between pay and performance. Equity compensation is viewed by many as the answer to the principal–agent dilemma. By giving an executive stock in the firm, as an owner, his interests will now be aligned with those of shareholders, and the executive will work to enhance firm performance. Equity compensation was on the rise during the 1990s when stock options became the largest component of executives’ compensation packages [Murphy, K. J. (1999). Executive compensation. Handbook of Labor Economics, 3, 2485–2563]. During the first decade of the new millennium, usage of restricted stock in compensation plans contributed to the executives’ total package. Whatever the form, equity compensation should induce managers to make decisions for the betterment of the firm.

Empirical evidence, however, has contradicted this ideal notion that mangers who are partial owners of the firm work to maximize firm value. Rather, managerial power in the form of earnings management and manipulation of insider information come to the forefront as a means by which executives can maximize the equity portion of their compensation packages. The Sarbanes–Oxley Act of 2002 as well as new accounting rules set forth by the Financial Accounting Standards Board may help to remedy some of the corporate ills that have surfaced in the past. This will not be possible, however, without compliance and increased corporate governance on the part of firms and their executives. Compensation committees must take great care in creating a compensation package that incites the executive to not only act in the best interest of his firm but also consider the welfare of the common good in his actions.

Details

Ethics, Equity, and Regulation
Type: Book
ISBN: 978-1-84950-729-5

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