Note: If you have any problems downloading or retrieving any of these articles,
please contact Aaron Zimmerman at azimmerman@hbs.edu. or Andrea Croteau at acroteau@hbs.edu.
Underwater Options and the Dynamics of Executive
Pay-to-Performance Sensitivities (with Tom Knox).
http://www.people.hbs.edu/bhall/ec/HK_JAR_.pdf
Six Challenges in Designing Equity-Based Pay, Journal of Applied Corporate Finance, Volume 15, Number 3, Spring 2003.
The published paper can be obtained from: http://www.sternstewart.com/journal/overview.php
The working paper version can be downloaded from:
http://papers.nber.org/papers/W9887
The Trouble with Stock Options, (with Kevin Murphy), Journal of Economic Perspectives, Volume 17, Number 3, summer 2003, pp 49-70.
The published paper can be obtained from: http://www.aeaweb.org/jep/
The working paper version can be found at: http://papers.nber.org/papers/W9784
Managing Option Fragility (with Thomas A. Knox) (2002)
This article describes and analyzes "option fragility"--a key problem
with options resulting from the fact that options, unlike stock, can fall underwater and destroy ownership and
retention incentives. The article also describes how companies “manage”
the problem of option fragility. The article can be downloaded at:
http://ssrn.com/abstract_id=316576
The article can also be downloaded as NBER working paper number 9059 at:
http://papers.nber.org/papers/W9059.pdf
Incentive Strategy: Executive Compensation and Ownership Structure (2002) This paper synthesizes much of my research and case-writing on executive compensation and equity-based pay design. The paper describes and analyzes 1. major trends in executive compensation, 2. the key challenges and tradeoffs inherent in executive compensation design, 3. how equity-based pay (stock and options) can create perverse incentives absent a sufficiently strong regulatory and financial infrastructure, 4. equity-based pay design, with an emphasis on the relative merits of stock versus option compensation, 5. ownership structure and corporate governance. The article can be ordered at the following site:
http://harvardbusinessonline.hbsp.harvard.edu/b01/en/common/item_detail.jhtml?id=902134.
A companion article, “Incentive Strategy Within Organizations” (2002), can also be ordered at:
http://harvardbusinessonline.hbsp.harvard.edu/b01/en/common/item_detail.jhtml?id=902131
Stock Options for Undiversified Executives (with Kevin J. Murphy, 2002) This article describes and analyzes the important distinction between the value of options to executives and the cost of options to companies. In particular, while standard option pricing models are helpful in determining the expected cost of options, they are not the right starting point for determining the value that risk-averse and undiversified executives (and employees) place on options. The article demonstrates that understanding the divergence between the cost and value of options explains or sheds light on a wide variety of facts and behaviors regarding executive pay design and executive pay trends. The article can be downloaded at:
A practitioner-oriented summary of this work, called “Option Value Does Not Equal Option Cost ,” is at:
A related article, “Optimal Exercise Prices for Executive Stock Options” (with Kevin J. Murphy, 2000), can be found at:
http://papers.nber.org/papers/W7548.pdf
Expense Options to Level the Compensation Playing Field (with Kevin J. Murphy, 2002) Weighing in on the current debate over the accounting treatment of options, this note makes the argument that options should be expensed to level the playing field between options and other types of compensation, particularly restricted stock.
Click here to download document in pdf format.
My coauthor on this research, Kevin J. Murphy, writes frequently on executive compensation. His website is at:
http://www-rcf.usc.edu/~kjmurphy/.
What You Really Need to Know About Stock Options (2000) This Harvard Business Review article describes the many types of multi-year stock option plans and analyzes the strengths and weaknesses of each plan. This, in turn, turn enables companies to better choose the option plan that is most aligned with their goals, and most suited to their circumstances. It can be ordered at:
http://harvardbusinessonline.hbsp.harvard.edu/b01/en/common/item_detail.jhtml?id=R00205
A related article, “The Design of Multi-Year Stock Option Plans,” can be found at:
http://www.sternstewart.com/journal/1999.shtml#v12n2
Are CEOs Really Paid Like Bureaucrats? (with Jeffrey B. Liebman, 1998) This article documents and analyzes the dramatic increase in CEO pay since 1980, which was almost entirely caused by the sharp increase in option awards. The article provides empirical analysis of how the relationship between CEO wealth and stock price performance increased over the period. It can be downloaded at:
http://mitpress.mit.edu/journals/pdf/qjec_113_03_653_0.pdf
The Taxation of Executive Compensation (with Jeffrey B. Liebman, 1999) Describes and analyzes the taxation of executive compensation, with an emphasis on how the taxation of option-based pay compares with the taxation of cash and stock-based pay. It can be downloaded at:
CEO Incentives and Firm Size (with George P. Baker, 2002) This paper documents the relationship between CEO incentives and firm size and shows the implications of this for appropriately measuring the pay-to-performance relationship.
Click here to download paper
in pdf format.
It can also be downloaded as an NBER working paper at:
http://nber.org/papers/W6868.
Compensation and Performance at Arrow Electronics
Massachusetts Financial Services
Incentive Pay for Portfolio Managers at Harvard Management Co.
A Note on Incentives in the NFL
Incentives and Controllability: A Note and Exercise
Performance Pay at Safelite Auto Glass