Employee Stock Options Why do companies issue options to executives if they cost the company more than they are worth to the executive? Why not just give cash and split the difference? Wouldn’t that make both the company and the executive better off?
To identify: Reason to issue employee stock option to executive and not to provide cash to split the difference and also determine whether the executive and the company has a better off.
Employee Stock Option:
Employee stock option is given by the company to attract and retain the employees in the organization. Company contract with the employee and gives the right to purchase some number of stock of share from the company within a period.
Answer to Problem 1CQ
- The performance of the company totally depends upon the performance of executive member of the company. If they have some stock in the company then they will work hard to improve the situation of the company so that value of their stock increases.
- If the employee stock option is given to the top management then they can be paid low so that other employee does not feel disparities in pay.
- If employee stock option is not provided to top management then they will have to pay more income tax. If this option is available with the top management then they have to pay tax only on capital gain which is lesser than the income tax.
Explanation of Solution
- Employee stock option is given to the executive so that they work hard and improve the performance of the company.
- When stock option is given to executive, they are paid low and disparity of high pay is finished.
So, employee stock option should be given to the executive to improve the performance of the company.
Want to see more full solutions like this?
Chapter 23 Solutions
Corporate Finance
- What is the value of Ls stock for volatilities between 0.20 and 0.95? What incentives might the manager of L have if she understands this relationship? What might debtholders do in response?arrow_forwardHow is it possible for an employee stock option to be valuable even if the firm’s stock price fails to meet shareholders’ expectations?arrow_forwardWhy are stock options a controversial employee benefit, particularly for top executives?arrow_forward
- What does it mean to say that managers should maximize shareholder wealth "subject to ethical constraints"? What ethical considerations might enter into decisions that result in cash flow and stock price effects that are less than they might otherwise have been?arrow_forwardIn developing a compensatory share option plan, a company's objective is to motivate executives and employees to manage the company in a way that increases stock price. to decrease employee turnover. to enhance compensation packages without having to expend cash. to do all of these options.arrow_forwardWrite a brief description of the logic behind the development of the time value formula for annuities. Why does stock-based compensation create a moral hazard for executives?arrow_forward
- What does it mean to say that managers should maximize shareholders' wealth "subject to ethical constraints"? What ethical considerations might factor into decisions that result in lower cash flow and stock price effects than they might have otherwise been valued?arrow_forwardWhich one of the following factors may affect stock return but out of the CEO's control?This chould potentially be a problem when trying up the compensation scheme to stock returns/ A.Supply chain risk management B.Federal monetary policy and regulations C.The rival firm recruits the company's employees D.Tte high inflation rate announced in the last quaterarrow_forwardWhich of the following is an advantage of a restricted-stock plan? A.The stock never becomes completely worthless. B.The plan creates new job opportunities in a company. C.The issuance of the stock increases the profit of a company. D.The creation of the plan increases the market price of the stock.arrow_forward
- a. How does the offering of stock options to CEOs attempt to align CEO incentives with shareholder incentives?b. Enron was a company that was ruined in part because of the stock options offered to upper management. Explain.c. In addition to accounting reforms, how might stock options be changed to try to prevent situations like what happened at Enron from occurring in the future?arrow_forwardThe rationale behind granting stock options is toinduce employees to work harder and be moreproductive. As the stock price increases (presumably due to their hard work), the employees sharein this added wealth. Another way to share thiswealth would be to grant shares of stock ratherthan options. What are the advantages anddisadvantages of using stock options rather thanshares of stock as employee incentives?arrow_forwardIf a company’s board of directors wants management to maximize shareholder’s wealth, should the CEO’s compensation be set as a fixed amount, or should the compensation depend on how well the firm performs? If it is based on performance, how should performance be measured? Would it be easier to measure performance by the growth rate in reported profits or the growth rate in the stock’s intrinsic value? Which would be the better performance measure? Why?arrow_forward
- Business/Professional Ethics Directors/Executives...AccountingISBN:9781337485913Author:BROOKSPublisher:CengageIntermediate Financial Management (MindTap Course...FinanceISBN:9781337395083Author:Eugene F. Brigham, Phillip R. DavesPublisher:Cengage Learning