Estimating the Cost of Executive Stock Options: Evidence from Switzerland

Arbeitspapier

It is often argued that Black-Scholes (1973) values overstate the subjective value of stock options granted to risk-averse and under-diversified executives. We construct a “representative” Swiss executive and extend the certainty- equivalence approach presented by Hall and Murphy (2002) to assess the value-cost wedge of executive stock options. Even with low coefficients of relative risk aversion, the discount can be above 50% compared to the Black-Scholes values. Regression analysis reveals that the equilibrium level of executive compensation is explained by economic determinant variables such as firm size and growth opportunities, whereas the managers' pay-forperformance sensitivity remains largely unexplained. Firms with larger boards of directors pay higher wages, indicating potentially unresolved agency conflicts. We reject the hypothesis that cross-sectional differences in the amount of executive pay vanish when risk-adjusted values are used as the dependent variable.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: WWZ Working Paper ; No. 17/07

Classification and Topics

• Classification: Wirtschaft ; Compensation Packages; Payment Methods ; Contingent Pricing; Futures Pricing; option pricing ; Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
• Subject: Managerial compensation ; incentives ; executive stock options ; option valuation ; risk aversion ; Aktienoption ; Führungskräfte ; Leistungsanreiz ; Risikoaversion ; Black-Scholes-Modell ; Schweiz

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Drobetz, Wolfgang ; Pensa, Pascal ; Schmid, Markus M.
• Event: Veröffentlichung
• (who): University of Basel, Center of Business and Economics (WWZ)
• (where): Basel
• (when): 2007

Further information

• DOI: doi:10.5451/unibas-ep61235
• Handle: http://hdl.handle.net/10419/123380
• Last update: 10.03.2025, 11:43 AM CET