@techreport{NBERw7548,
 title = "Optimal Exercise Prices for Executive Stock Options",
 author = "Brian J. Hall and Kevin J. Murphy",
 institution = "National Bureau of Economic Research",
 type = "Working Paper",
 series = "Working Paper Series",
 number = "7548",
 year = "2000",
 month = "February",
 URL = "http://www.nber.org/papers/w7548",
 abstract = {Although exercise prices for executive stock options can be set either below or above the grant-date market price, in practice virtually all options are granted at the money.  We offer an economic rationale for this apparent puzzle, by showing that pay-to-performance incentives for risk-averse undiversified executives are typically maximized by setting exercise prices at (or near) the grant-date market price. We provide an operationally useful alternative to Black-Scholes (1973) for the purpose of both valuing executive stock options and  measuring the incentives created by options. Our framework has implications not only for exercise-price policies, but also for indexed options, option repricings, exchanges of cash for stock-based compensation, and the design of bonus plans.},
}