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Costs and Incentive Effects of Stock Option Repricing

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Ulrike Neubauer

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.
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?