Does repricing of executive stock options, i.e. the practice of lowering the exercise price when options are out-of-the-money unfairly reward managers for poor performance and thereby undermine incentives set by the compensation contract? In a study that compares the pay package containing repriced option with an otherwise adjusted package it is shown that repricing is not more expensive to shareholders than otherwise adjusting non-option compensation components. However, the package containing repriced options provides significantly stronger incentives. Furthermore, a policy that constrains the board of directors from repricing does not have significant effects on shareholders’ returns.
Frankfurt am Main, Berlin, Bern, Bruxelles, New York, Oxford, Wien, 2004. XVII, 219 pp., 2 fig., num. tables
Contents: Does repricing of stock options expropriate rents from shareholders? – Is repricing more expensive than otherwise
adjusting pay components? – Can repricing help reincentivize managers? – How does the stock market react to the announcement
that firms prohibit repricing?