Stock Option Mechanism: Do Compensations Really Increase Shareholder Value?

Stock Option Mechanism: Do Compensations really Increase Shareholder Value?

ABSTRACT Even though compensation plans can attract talents, in the common view, they are considered something “shameful” or unethical (especially after the financial crisis). Stock option plans and stock granting are also quite useful especially for bigger firms as an instrument used to align managers and shareholders value. We have focused on stock options and grating plans, using a vast body of past literature and empirical evidences in the Italian case. We also present the fiscal law evolution in Italy on the stock options matter. We conclude performing an econometric analysis which shows the relationship between firm performance and the amount of compensations. We have used a multiple non-linear regression model and results show a positive statistically significant relation between the independent variable of interest and the dependent one.

Giulia Virginia Brivio Francesco Maria Esposito Federico Faggioni Fabrizia Pulzone

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1. Introduction to stock options plans The relevance and the usage of Stock options in the last decades have increased significantly. They have the particular feature to incentive top management, the members of the BoD and the CEO to increase the total value of the firm, its profits and the shareholder value. In the last few years these are the most common used payment instruments for Executives, especially in larger firms. Usually they are provided for free to top managers and to employees in order to give them the opportunity to earn more from their good performance and their productivity. Indeed, in this way their remuneration should be strictly linked to shareholders value. Moreover this instrument can significantly reduce conflicts of interest between managers and shareholders. In particular it is a kind of derivative which allows the owner to buy, in case shares were already issued, or to underwrite new issued...