Selecting suitable compensation plans of executive stock options

Abstract

Theoretical and empirical works have emphasized that executive stock option plans play an important role in compensation management and corporate governance owing to the incentives to increase firm stock price and volatility levels. This study not only proposes models of executive stock options and constructs value-matched financial variables for comparing the incentive effects towards these options, but also develops an empirical study exploring the characteristics of executive stock options and suitable compensation management for companies. This investigation examines the daily value and compares incentive effects of six kinds of executive stock options with the empirical data of TSMC, the world's largest dedicated semiconductor foundry, which is listed on the TSE and NYSE. Empirical results indicate that purchased options would be the best choice for companies that are unsuitable to undertake risky investments, while the relative indexed options are appropriate for bear markets and good for companies whose executives are highly risk averse. Repriceable options are not recommended due to their high costs and weak incentive effects.