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| Author: | Drobetz, W. Pensa, P. Schmid, M.M. |
| Title: | Estimating the cost of executive stock options: evidence from Switzerland |
| Journal: | Corporate governance
2007 : SEP, VOL.15:5, p. 798-815 |
| Index terms: | board of directors executive remuneration managers incentives stock options pay Switzerland |
| Language: | eng |
| Abstract: | Black-Scholes (1973) (here as: B-S.) values are often argued to overstate the subjective value of stock options (henceforth as: s-opts.) granted to risk-averse and under-diversified executives. This study builds up a "representative" Swiss executive, extending the certainty-equivalence approach presented by Hall and Murphy (2002) to assess the value-cost wedge of executive s-opts. Even with low coefficients of relative risk aversion, the discount can be above 50 percent compared to the B-S. 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 pay-for-performance sensitivity remains largely unexplained. Firms with larger boards of directors pay higher wages, indicating potentially unresolved agency conflicts etc. |
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