My sister, Mary forwarded this interesting, brief summary of research (PDF) on the shareholder effects of large option grants to the chief executive.

QUESTION for shareholders: If the company’s directors give lots of options to the chief executive, should you be happy or nervous?

The traditional answer from academia was that big options grants were good. They aligned the interests of executives with shareholders, and they helped to offset the tendency of executives to avoid risky but potentially profitable investments.

But it turns out that the conclusions were based more on optimistic theories than data. Now, with option grants having become the largest portion of chief executive compensation – worth more than either salary or bonus for the average boss – analysis of data on corporate performance provides some disturbing results.

It appears that really big options grants make it more likely that companies will fudge their numbers and that companies with such grants are more likely to go broke.