Power Options in Executive Compensation Carole Bernard † , Phelim Boyle § and Jit Seng Chen ‡* † Department of Finance, Grenoble Ecole de Management. § School of Business and Economics, Wilfrid Laurier University. † Gilliland Gold Young, Toronto. Email: carole.bernard@grenoble-em.com, pboyle@wlu.ca, jitseng.chen@ggy.com June 14, 2015 Abstract Tian [2013] shows that firms are better off linking incentive pay to average stock prices. This paper proposes a new type of executive stock option contract that improves upon Tian [2013]’s Asian executive option. This contract is a type of power option and its price has a simple closed-form expression under standard Black-Scholes assumptions. Numerical results show that the new contract is on average four percent cheaper than Tian’s. Holding constant the company’s cost of option issuance, the power option is more valuable to executives and has superior incentive properties compared to Tian’s Asian executive option and to the standard call option. Key-words: Executive compensation, Cost-efficiency, Asian options, Optimal contracting, Incentive effects. JEL classifications: G13, G30, J33, M52. * C. Bernard and P. Boyle also acknowledge support from the Natural Sciences and Engineering Research Council of Canada. 1