Executive stock options after Enron: Theorizing managerial Power within institutional environments

This paper expands recent theories of managerial power (Bebchuk and Fried 2004) to include insights from institutional theory to analyze changes to executive compensation in the wake of the recent corporate scandals at Enron and other corporations. I argue that the scandals generated substantial challenges to the legitimacy of executive compensation practices, and in particular, executive stock options. Using panel data on executive compensation in the S&P 500 between 2001 and 2005, I examine how institutional pressures emanating from these legitimacy challenges led to changes in the value of executive stock options. The findings reveal that during this period, corporations facing investigations for corporate fraud and shareholder activism provided executives with less valuable stock option grants. In addition, the results suggest that CEOs faced constraints in their power to extract rent through their compensation arrangements, and independent directors were able to reduce the value of executive stock options. The analysis therefore reveals that both institutional environments and the structure of corporate boards have important influences on the structure of organizational practices that have important implications for income and wealth inequality.

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