Market-Adjusted Options For Executive Compensation

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Abstract
Compensation theory implies that managers should not be rewarded or penalised for factors outside their control. However, firms do not adjust the exercise prices of executive stock options to reflect overall stock market movements that are outside the control of the manager. This results in an option much more expensive than necessary to reward a particular level of relative performance. Current accounting rules give firms a strong incentive not to adjust the prices of the options, since to do so would result in a higher reported expense despite the lower economic cost. (This abstract was borrowed from another version of this item.)
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