Abstract
Executive stock options are used widely in compasation plans. A typical stock option has a fixed strike price. But it has attracted heavy criticism that it unfairly rewards executives for the market's success instead of their own efforts. Therefore, in this paper, we propose two geometric averaged stock options, which have a strike price moving with a benchmark to filter out marketwide factors beyond the executive's control, and evaluate his managerial ability in both up and down markets. We processe as follows: First, we derive a pricing model for the stock options. Then we investigate the values compared to taditional and another indexed stock options. Last, we consider the incentive effect peculiar to the geometric averaged stock options.
