In this paper, we propose a new class of exotic stock options which is designed to optimally align executive’s interest with shareholders’interest. We find that these new options perform better than traditional compensation schemes such as cash-only and
cash-and-stock-options under continuous investment opportunities setting. We also find that the gains from the new stock options are quite considerable and also robust to uncertainty over executive’s preferences.
Keywords: Executive stock option; Agency problem; Career-concern; Exotic stock option
JEL classi…cation: G32; G30
