In the past decade, there has been a considerable increase in the use of stock options as a form of executive compensation. While agency theorists study the relationship between performance based pay and job productivity, they have not addressed whether executive compensation is impacted by a firm's profitability. Profitable firms may pay executives more incentive-based pay, to reward their managers for a good job. In contrast, non-profitable firms may be willing to pay executives more in the

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... y stock options to attract better managers. We find that a CEO's probability of receiving stock options increases if he/she is employed by a profitable firm. However, the amount received by such a CEO is substantially less than the amount received by the average CEO at a non-profitable company.