The Effectiveness of Stock Option Plans

Abstract

Despite Stock Option Plans' (SOPs) widespread use, evidence regarding their use and their effectiveness is relatively sparse and typically relies on an agency theory perspective that emphasizes the principal's interests in a market context. This study focuses on the agent as an individual who is involved in SOP management. Eighteen interviews with senior executives were conducted. Their responses indicate that SOPs are used to (a) initially align management's incentives, (b) attract and retain key personnel, and (c)facilitate the payment of high levels of executive compensation. SOPs are successful when they are paid to employees whose actions influence stock prices. Our analysis suggests that no single theory provides a comprehensive explanation of SOP management. A critical assessment of agency theory as the dominant paradigm in executive compensation research and practice is presented, and the need for an integrated theoretical perspective for understanding SOPs is discussed.