On Target : An Examination of CEO Stock Option Performance Hurdles

In this paper, we have looked at the choice of performance targets using a unique panel database on UK CEO executive option performance targets. Using this data on performance targets along with governance data and financial data for company accounts with year ends from 2001 to 2003, we find that the rate of switch in types of targets and in levels of targets has been slow. Furthermore, those with high levels of institutional shareholding are less likely to use pure EPS targets, perhaps because that pure EPS targets are inconsistent with the relative performance targets predicted by agency theory. We find confirmation of the correlation between levels of targets and average analyst estimates of earnings but at the same time higher forecasts only translate into weakly higher targets. We also conclude it is difficult to predict changes in targets from any variables in our dataset and indeed when changes in target levels occur they tend to be rather large