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A Comparison of Options, Restricted Stock, and Cash
for Employee Compensation
Paul Oyer and Scott Schaefer
September 4, 2003
Abstract
Using a detailed data set of employee stock option grants, we compare observed stock-optionbased
pay plans to hypothetical cash-only or restricted-stock-based plans. We make a variety
of assumptions regarding the possible benets of options relative to cash or stock, and then
use observed option grants to make inferences regarding rms' decisions to issue options to
lower-level employees. If the favorable accounting treatment is the sole reason underlying rms'
choices of options over cash-only compensation, then we estimate that the median rm in our
data set incurs $0.64 in real costs in order to increase reported pre-tax income by $1. This gure
is several times larger than the willingness-to-pay for earnings reported by Erickson, Hanlon and
Maydew (2002), who study rms that (allegedly) commit fraud in order to boost earnings. If,......

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Approximate Word Count: 11213
Approximate Pages: 45 (250 words per double-spaced page)

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