Restoring the link between pay and performance
Subtitle: evaluating the costs of relative-performance-based (indexed) options
By: Lisa K. Meulbroek
Contributors: Harvard Business School. Division of Research
Series: Working paper / Division of Research, Harvard Business School -- 02-021; Working paper (Harvard Business School. Division of Research) -- 02-021
Publisher: Division of Research, Harvard Business School
Published: 2001
Place of publication: Boston
Language: eng
Number of pages: 58
Description: Conventional stock options, say their critics, do not adequately discriminate between strong and weak managers because their value fluctuates with the performance of the overall market. Such critics propose replacing conventional stock options with options whose payoff depends on firm performance relative to some market or industry benchmark. While these relative-performance-benchmarked options (also referred to as "indexed" options) offer the benefits that accrue from a tighter link between managers' pay and their performance, they also have costs. This paper compares the "dead weight costs" of relative-performance-benchmarked options to those of conventional options.
Notes: Includes bibliographical references.