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Review of Finance Advance Access originally published online on April 3, 2008
Review of Finance 2009 13(1):147-180; doi:10.1093/rof/rfn001
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The Author 2008. Published by Oxford University Press on behalf of the European Finance Association. All right reserved. For Permissions, please email: journals.permissions@oxfordjournals.org

Option Compensation and Industry Competition

Neal M. Stoughton1 and Kit Pong Wong2

1 University of Calgary
2 The University of Hong Kong

Compensation policy has become one of the most important ingredients of corporate governance. In this paper we take a new look at the issue, by contrasting the use of options with that of stock. We do this by integrating the repricing or resetting aspect of options with that of industrial structure. We show that industry competition may play an important role in dictating which form of compensation is optimal. When aggressive competition for key professional staff is an issue, the flexibility of options may actually become a disadvantage and therefore pure stock compensation may survive as an equilibrium. Thus compensation trends may be partly explained by trends in the nature of the competitive environment.

Key Words: G30 • D21 • D43


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