The Trouble with Stock Options

41 Pages Posted: 13 Jun 2003

See all articles by Brian J. Hall

Brian J. Hall

NOM Unit Head, Harvard Business School; National Bureau of Economic Research (NBER)

Kevin J. Murphy

University of Southern California - Marshall School of Business; USC Gould School of Law

Multiple version iconThere are 2 versions of this paper

Date Written: May 2003

Abstract

The trouble with options is that too many options are granted to too many people. Most options are granted below the top-executive level, and options are often an inefficient way to attract, retain and motivate executives and (especially) lower-level employees. Why, then, are options so prevalent? We discuss several explanations including changes in corporate governance, reporting requirements, taxes, the bull market and managerial rent-seeking. We also offer an alternative hypothesis that we believe explains the over-use of options and several apparent puzzles: boards and managers falsely perceive stock options to be inexpensive because of accounting and cash-flow considerations.

Keywords: Executive compensation, stock options, equity-based pay, CEO pay, corporate governance, executive labor markets

JEL Classification: J00, J33, G34, L20

Suggested Citation

Hall, Brian and Murphy, Kevin J., The Trouble with Stock Options (May 2003). Available at SSRN: https://ssrn.com/abstract=415040 or http://dx.doi.org/10.2139/ssrn.415040

Brian Hall (Contact Author)

NOM Unit Head, Harvard Business School ( email )

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HOME PAGE: http://www.people.hbs.edu/bhall/

National Bureau of Economic Research (NBER)

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Kevin J. Murphy

University of Southern California - Marshall School of Business ( email )

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213-740-6650 (Fax)

USC Gould School of Law

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Los Angeles, CA 90089
United States

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