You chair the compensation committee of the board of directors ofAndroscoggin Copper. A consultant suggests two stock-option packages for the CEO:
a. A conventional stock-option plan, with the exercise price fixed at today’s stock price.
b. An alternative plan in which the exercise price depends on the future market value of a portfolio of the stocks of other copper-mining companies. This plan pays off for the CEO only if Androscoggin’s stock price performs better than its competitors’.
The second plan sets a higher hurdle for the CEO, so the number of shares should be higher than in the conventional plan. Assume that the number of shares granted under each plan has been calibrated so that the present values of the two plans are the same.
Which plan would you vote for? Explain.
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