Alignment vs rent-extraction effects of stock options. A conceptual model

Abstract

Purpose This paper aims to develop a conceptual model that systematically interprets how key governance factors drive the alignment and the rent-extraction effects of executive stock options (SOs) as proxied by plan characteristics. Design/methodology/approach The authors draw on the review of 202 articles published in international academic journals. They collect data from library databases and by hand-searching and citation-tracking relevant papers on the topic. Moreover, the authors review and classify the studies as related with determinants or proxies of alignment and rent-extraction effects of SOs. Findings The conceptual model systematically interprets the results of the literature review and identifies the relationships between archetypes, driving factors and proxies of the rent/alignment effect of executive SOs. It highlights that, given ownership archetypes, effective (ineffective) governance practices drive the alignment (rent) aim of SOs as proxied by the optimal (non-optimal) plan design. Practical implications This paper supports compensation committees in selecting the SO characteristics that better attract investors and retain executives. Moreover, it guides future policy making interventions aiming at mitigating the rent-extraction effect of SOs. Originality/value The paper highlights that the governance determinants of SO aims can be effectively classified as archetypes or drivers of rent-extracting and aligning outcomes of these remuneration tools. Moreover, it offers a useful framework to guide future research efforts by providing a comprehensive interpretation of the relationships between ownership archetypes, driving factors and proxies of SO effects.