Pretty cool idea...short version: if stock price goes up significantly (you can index it if you want), then options vest earlier in order to lessen the increased managerial risk aversion problem that can be caused by managers' wealth being in the form of deep in the money options. Of course it might exasperate managerial incentive to withhold bad news but still I like the idea!
Success on several fronts. The paper is not only good, it is available from the Western Financial Association's meeting site.
A brief taste:
"Issued at-the-money, ESOs can provide incentives for managers to take risks. Yet if traditional calendar vesting options move deep in-the-money, perhaps years prior to vesting, they lose their convexity in payoffs andmay offer counter-productive incentives causing risk-averse managers to reject profitable risky projects. We address this problem and propose an alternative vesting schedule. We show that by making the proportion of options that vest a gradually increasing function of the stock price achieved, the firm can ensure that appropriate numbers of options are retained when still providing risk-taking incentives, but exercised once they have lost their convexity, thereby allowing the firm more efficiently to rebalance risk-takingincentives for the manager."Good stuff!!