School of Business > UPDATE > Fall 2001 > Article

Research Brief
The Politics of Repricing CEO Stock Options

Assistant Professor Timothy G. Pollock; Harald M. Fischer, a doctoral candidate in management and human resources; and Associate Professor James B. Wade, explored why some companies reprice CEO stock options while others do not. They examined the computer-software industry in the last six months of 1998, when the stock market as a whole suffered a significant downturn and then recovered. They investigated 136 firms, gathering monthly data on option repricings, size of executives' options packages, stock prices, company finances and stock ownership by institutional investors and CEOs.

Pollock, Fischer and Wade presented their study, "The Role of Politics in Repricing Executive Options," at the Academy of Management's annual meeting in August and in an article in the Academy of Management Journal.

What they found: In the 17 companies that repriced CEO options, the average decline in share price between June 1 and the month before repricing was 46.7 percent, which was more than matched by an average 50 percent reduction in strike prices. The size of negative spread - that is, the difference between strike price and current share price - emerged as the primary determinant of repricing. But corporate politics significantly increased or reduced its likelihood. If the CEO were chairman of the board, a sign of entrenched executive power, it substantially increased the odds for repricing. CEO ownership of 20 percent of a company's shares reduced the likelihood of repricing to about half what it was for CEOs owning two percent.

These results, the authors concluded, suggest that stock options are ineffective in aligning management and shareholder interests. "Options repricing," they conclude, "is associated with outcomes diametrically opposed to the rationale provided by proponents of such repricing."

According to Wade, "One implication of this study is that restricted stock awards, which increase direct CEO ownership but prevent the CEO from selling the stock for a period of time, rather than stock options, may be a superior tool in aligning the interests of investors with those of management."