New Performance-Vested Stock Option Schemes

Abstract

In the present paper, we analyze two effective non-traditional performance-based stock option schemes which we call Parisian and constrained Asian executives' stock option plans. Both options have a criterion on the terminal value similar to a call option, but in addition impose a restriction on the path of the firm's assets process. Under a Parisian option scheme, the bonus of the executives becomes effective when the stock price has outperformed a certain threshold for a fixed length of time. Under the constrained Asian scheme, the executives' compensation is coupled with the average performance of the stock price. We show that the value of both ESO schemes are less sensitive to changes in risk than plain vanilla options and hence represent an alternative compensation scheme that could make exaggerated risk taking through the executives less likely.

Keywords: Executive Stock Options, Asian Options, Parisian Options

JEL Classification: G12, G13, G30