Are stock options grants to ceos of stagnant firms fair and justified?

Journal of Business Ethics 90 (1):137 - 155 (2009)
Abstract
Prior research has examined several ethical questions related to executive compensation. The issues that have received most attention are whether executives' pay is fair and justified by performance. Since more recent studies show that stock options grants constitute the single largest component in executive compensation, we examine the relations of these grants to economic determinants and corporate governance for firms in the stagnant stage of their lifecycle. We find that, on average, stock options grants comprise a significant portion of annual CEO compensation (26.4%) for stagnant firms. We also find that economic (corporate governance) factors explain less (or more) of the cross-sectional variation in stock options grants for stagnant firms than for growth firms. Furthermore, we document lower pay-performance sensitivity (i.e., weaker incentive alignment) and no improvement in future firm performance from past stock options grants to CEOs of stagnant firms. In particular, our study provides empirical evidence on some inefficiencies associated with stock options grants to CEOs of low potential (stagnant) firms, a long-standing concern of business ethics researchers (Moriarty, 2005; Nichols and Subramaniam, 2001; Perel, 2003). Our results also provide support for the corporate governance reforms discussed in Matsumura and Shin (2005), especially those proposed provisions that curtail the power of CEOs in the governance of firms
Keywords executive compensation  business ethics  stock options  life cycle  economic determinants  pay-performance sensitivity
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    References found in this work BETA
    Jeffrey Moriarty (2005). Do CEOs Get Paid Too Much? Business Ethics Quarterly 15 (2):257-281.
    Mel Perel (2003). An Ethical Perspective on CEO Compensation. Journal of Business Ethics 48 (4):381-391.
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    Geoffrey Poitras (2007). Accounting Standards for Employee Stock Option Disclosure. International Journal of Business Governance and Ethics 3 (4):473-487.
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