"The Compensation and Incentive Components of Executive Stock Option"

The Compensation and Incentive Components of Executive Stock Option Value Stock options serve to provide both compensation and incentives for executives, but little is known about how much of option value is compensation and how much is incentives. We show that a simple adjustment to the option terms removes the compensation element, thereby isolating the incentive element. Empirical estimates reveal that compensation is about half of option value and a median of about 13 percent of total pay and 21 percent of total compensation. These results have implications for understanding compensation and incentive value and potentially give a better definition of the component of option value that should be expensed.