Title: Restoring the link between pay and performance
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.