A new study by Professors W. Gerard Sanders of Brigham Young University and Donald Hambrick of Pennsylvania State University found that "options-loaded CEOs have a disproportionate tendency to generate more big losses than big gains."

"They strike out much more often than they hit home runs," Sanders said. "It really becomes a 'Heads I win, tails you lose' scenario. If the risky strategy pays off, the executives win and if it doesn't, the company's stockholders lose."

Stock options give chief executives the right to buy a specific number of shares on some future date at what is known as the "strike price," which often is the price of the company's shares on the date the options are granted.

Options typically are granted top executives as a performance incentive under the belief management will be rewarded if it is successful in bettering the company so that its shares rise above the strike price of the options. When that happens, an executive can exercise the options by acquiring the company's shares at the strike price and then immediately turn around and sell those shares for a profit.

Yet Sanders points out there is no downside to options for executives because they doesn't cost them anything if the price of the company's shares doesn't rise above the strike price. The options will simply expire.

And it is that lack of a downside that encourages executives to take big risks in the hope of striking it rich, Sanders said. "What we found was the big losses were much more common than big gains under high levels of stock-option pay."

Sanders and Hambrick reached their conclusion after randomly selecting 950 companies from the Standard & Poor's 500, Mid-Cap and Small-Cap indexes. They compared the proportion of CEO compensation paid in the form of options with the financial results of the companies several years later.

In their study published recently in the Academy of Management Journal, the two professors reported that in companies where stock options make up 50 percent or more of a chief executive's pay, 10 percent of those corporations reported significant losses, while only 6.8 percent saw large gains.

"Those were pretty revealing numbers," Sanders said.

Ryan Ellis is chief executive of the American Shareholders Association, which says it represents the 50 percent of U.S. households that own stocks and 70 percent of voters who own stocks, bonds and mutual fund shares. He thinks the study's findings are significant.

"The general assumption has been that the main advantage of granting stock options is that it gives top management 'skin in the game'," Ellis said.

"So if their numbers are correct and granting stock options as motivation isn't producing the desired results, it is pretty revealing."

Ellis noted that granting stock options became popular in the 1990s after the Clinton tax increase that resulted in Congress limiting the pay of chief executive officers to $1 million annually. Corporations then began to look at other ways to compensate their top management.

Stock options still amount to the largest component of rising CEO pay in the U.S., but Ellis noted that their popularity is fading, with some companies having moderated their use.

Although Sanders and Hambrick believe stock options may have a place if they are awarded to CEOs in moderation, they suggest a better alternative is for companies to award restricted shares of company stock that can be sold only after a specific amount of time passes.

"CEOs who held large amounts of stock delivered results that were not as lopsidedly negative" as those who were awarded stock options," they said in the report.

steve@sltrib.com