What do CEOs Realize from Option Pay

We compare the proceeds that CEOs realize from exercising stock options with the total nominal value (estimated fair value) of option pay that they receive during their tenures. For a sample of CEOs who completed their tenures during the period from 1992 to 2007, we find that the amount realized from exercising options is about 68% of the nominal value of options received and that realized total pay is about 83% of the nominal value of total compensation received. Realization of option pay is affected by firm performance in two ways. First is the inherent relation between option payouts and stock performance. Second is the managed relation between option payouts and performance due to exercise provisions that depend on decisions made by the Board and the CEO after the grant date. Because realization of option pay is affected by post-grant-date decisions, we consider whether realization of option pay varies across types of CEO-firm contracting situations. Specifically, we find that outsider CEOs and CEOs who were previously top-five executives at larger companies realized proportionately less of their nominal pay than other CEOs. Our findings indicate that option pay-outs are on average less than nominal option pay and that pay-outs differ across contracting situations. These differences may partially explain higher nominal compensation for externally-hired CEOs.