Reload Employee Stock Option Plans: Incentive Alignment or Rent Extraction

Abstract: A reload option awards a new option for every share tendered to exercise an existing option. We use a sample of 242 firms that adopted reload provisions to investigate claims that firms use reload options to encourage early exercise and increase share ownership (incentive alignment) against the competing claim that reloads transfer wealth from shareholders to managers. We find that CEOs of reload firms tend to have lower levels of ownership and less influence over the Board of Directors than CEOs of firms in a control group. Our results are generally more consistent with the incentive alignment hypothesis than the competing wealth transfer (rent extraction) hypothesis.