Stock Options

The purpose of incentive schemes for executives is to align their objectives with those of the owners of the company; this is what people refer to as solving the principal-agent problem. In a company, shareholders are principals and managers are agents. The main argument in favour of stock option plans is that they give executives a greater incentive to act in the interests of shareholders by providing a direct link between realized compensation and company stock-price performance. In addition, offering employee stock options in lieu of cash compensation allows companies to attract highly motivated and entrepreneurial employees, and also lets companies obtain employment services without (directly) expending cash. Options are typically structure...