Executive Stock Options: Early Exercise Provisions and Risk-taking Incentives



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    • Neil Brisley is at the Richard Ivey School of Business, University of Western Ontario. I acknowledge the support of an “Ivey MBA Class of 1989 Faculty Fellowship.” An earlier version of this paper formed part of my Ph.D. dissertation at INSEAD, and was supported by doctoral scholarships from INSEAD and the Sasakawa Foundation. I am very grateful for the input and support of my thesis committee, Bernard Dumas (Chair), Walid Busaba, and Matti Suominen. I also received useful comments from Paolo Fulghieri, Mark Huson, Dima Leshchinskii, Pascal Maenhout, Arzu Ozoguz, Lucie Tepla, and an anonymous referee and participants at the 2005 Western Finance Association meeting in Portland, the 2005 European Finance Association meeting in Moscow, the 2005 European Financial Management Special Symposium on Corporate Governance in Leeds, and the 2002 Northern Finance Association meeting in Banff. Special thanks to José-Miguel Gaspar. Any errors are my own.


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.