Managerial Stock Option Contracts and Firm Performance

Stock option programs (STOP’s) have become an important part of executive compensation in many countries worldwide. However, the question of whether executive stock options contribute to the creation of shareholder value is unsolved so far. There is only limited empirical evidence of positive wealth effects for shareholders due to the introduction of option programs. One reason for the limited results of the empirical research so far could be the lack of discrimination between good and bad stock option programs. Based on incentive, tax and insider arguments, I suggest a catalogue of criteria which should be met by a good program. I then present my findings on the quality of stock option programs of a sample of German firms. It can be shown that most programs are of inferior quality. While an inefficient design with respect to German corporate tax is the most striking indicator of low program quality, the majority of firms fail to meet other criteria as well.