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Type: Journal article
Title: Is there a firm-size effect in CEO stock option grants?
Author: Rosser, B.
Canil, J.
Citation: Corporate Ownership and Control, 2008; 6(1):115-126
Publisher: Virtus Interpress
Issue Date: 2008
ISSN: 1727-9232
Abstract: Schaefer (1998) and Baker and Hall (2004) posit a firm size effect for regular executive compensation but not specifically for executive stock option grants. They propose an inverse relation between pay-performance sensitivity and firm size along with a positive relation between the marginal productivity of executive effort and firm size. The product of pay-performance sensitivity and executive productivity is 'incentive strength'. They find a weakly positive association between incentive strength and firm size. We substitute Hall and Murphy's (2002) pay-performance sensitivity metric to detect a firm size effect in CEO stock option grants. After adjusting for small-firm risk aversion and private diversification 'clienteles', we document evidence of a residual small-firm effect impacting on incentive strength principally through grant size. Given lower small-firm deltas, grant size appears to have been increased by compensation committees to ensure small-firm CEOs are not under-compensated relative to their large-firm counterparts. We also find that firm complexity influences pay-performance sensitivity as well, but not labor productivity (proxying for CEO productivity). No evidence is found that firm smallness and complexity impact on labor productivity. However, we empirically confirm a negative relation between pay-performance sensitivity and firm smallness and, by implication, firm complexity.
Keywords: executive stock options; pay-performance sensitivity; firm size
Description: © 2008 Social Science Electronic Publishing, Inc
RMID: 0020084262
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Appears in Collections:Business School publications

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