Summary.
In this paper we are concerned with the performance of stock option contracts in the provision of managerial incentives. In our simple framework, we restrict the space of contracts available to the principal to those conformed by a fixed payment and a call option on the firm’s stock. As compared to the fixed payment and the option grant, we find that the strike price plays an intermediate role in the provision of insurance and incentives. We also develop some methods for the calibration of a standard principal-agent model based upon observed CEO earnings schedules and the volatility of the firm’s value in the stock market. These methods are useful to address some important issues such as the performance of stock option contracts, the degree of risk aversion compatible with current earnings profiles and the sensitivity of compensation to changes in firm’s characteristics.
Article PDF
Similar content being viewed by others
Avoid common mistakes on your manuscript.
Author information
Authors and Affiliations
Corresponding author
Additional information
Received: 9 April 2003, Revised: 13 September 2004,
JEL Classification Numbers:
C6, D83.
Correspondence to: Manuel S. Santos
We have benefitted from helpful discussions with Marco Celentani, Hector Chade, Alejandro Manelli and Ed Schlee. We are especially grateful to an anonymous referee for very detailed comments.
Rights and permissions
About this article
Cite this article
Aseff, J.G., Santos, M.S. Stock options and managerial optimal contracts. Economic Theory 26, 813–837 (2005). https://doi.org/10.1007/s00199-004-0563-8
Issue Date:
DOI: https://doi.org/10.1007/s00199-004-0563-8