Understanding the rise and fall of stock options compensation: Taking principal-agent conflicts to the institutional (battle)field

Researchers that have used agency theory predictions of monitoring and incentive alignment that focus solely on principal-agent relationships at the organizational level have been unable to rationalize the use and design of stock options within organizations. In the early 1990s, stock options were virtually free, but eventually, organizations were required to disclose the value of the options in the footnotes of their financial statements. This imperative ignited a battle between agents (and their advocates) who opposed the formal accounting of options and shareholders (and their advocates) who changed their opinions about options over time. In this article, we develop a model to explain how the varying pressures across the various stages of institutionalization cannot only explain how principals and agents are influenced by the institutional environment in making options compensation decisions, but also when and how these parties will shape institutional contexts at the field level to encourage, perpetuate, or delegitimate the stock option arrangements that these actors prefer.