Out of the money : The effects of underwater stock options on voluntary executive turnover

Stock option grants have become an increasingly popular component of executive compensation as firms seek to align the interests of executives and shareholders. For example, in 1999, 47% of the total compensation of S&P 500 executives was accounted for by stock options, up 22% from 1992 (Hall & Murphy, 2002). In contrast to their increased popularity, the value of executives’ stock option portfolios have experienced massive depreciation in recent years. One recent survey suggested that more than 80 percent of US companies had underwater stock options, with more than one-third reporting that 50% of their outstanding options were underwater (Corporate Board, 2001).