Stock options and managerial optimal contracts

Jorge G. Aseff, Manuel S. Santos

Research output: Contribution to journalArticlepeer-review

17 Scopus citations


In this paper we are concerned with the performance of stock option contracts in the provision of managerial incentives. In our simple framework, we restrict the space of contracts available to the principal to those conformed by a fixed payment and a call option on the firm's stock. As compared to the fixed payment and the option grant, we find that the strike price plays an intermediate role in the provision of insurance and incentives. We also develop some methods for the calibration of a standard principal-agent model based upon observed CEO earnings schedules and the volatility of the firm's value in the stock market. These methods are useful to address some important issues such as the performance of stock option contracts, the degree of risk aversion compatible with current earnings profiles and the sensitivity of compensation to changes in firm's characteristics.

Original languageEnglish (US)
Pages (from-to)813-837
Number of pages25
JournalEconomic Theory
Issue number4
StatePublished - Nov 2005
Externally publishedYes


  • CEO earnings schedule
  • Optimal contract
  • Stock option contract
  • Stock price

ASJC Scopus subject areas

  • Economics and Econometrics


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