Executive Stock Options

Question: Describe about the Executive Stock Options? Answer: Meaning of employee stock options: The executive stock options is the way through which the executives are able to maximise the value of their firms. They increase the value of the firm with the volatility of the underlying stock. These options induce the managers to take more risks so as to increase the risk of the firms. And the executives respond to such risks. There is a statistical evidence that signifies that there exists a relationship between the option holdings by the executives and the subsequent increase in the risk of the firm. This sort of a relationship includes the fixed effects and the year effects and a variety of other controls and may not even seem to be driven by the reverse causality. (Research gate, 2015) The main aim of the executive stock options is to assign some of the asymmetric payoff to the managers so that they could be inclined to undertake more amount of risks. (DeFusco, Johnson Zorn, 1990) The following are the advantages of executive stock options: 1. Attraction of employees: many of the companies are well aware of the difficulties that they face when it comes to attracting the talented staff.it is like a successful sports team, grow and quo. When it comes to attracting the experiences players from the other sports team, the employers must also follow the same path. The top recruiting firms as such as the Kelly services and others, sponsored the searchers so as to look for the best available talent during the recession times. 2. Creating dedicated employees: the employers try and attract the employees and motivate them to be loyal. Many of the theorists have a huge amounts of theories about the variety of the suggestions and the programs. These benefits are for the people that are dedicated and the company wants to keep. 3. Cost effectiveness: all the employees continue to derive benefits when the companies expand their business operations and offer a high value for the moderate cost. These stock options often prove to be stronger when they are for the benefit of the employees and are cost effective for the companies. The only costs that the company bear are of the lost opportunities in order to sell some of the stock at the market value. (Small chron, 2015) The following are the disadvantages of executive stock options: The accounting scandals like Enron, WorldCom, Global Crossing and other companies has been linked with the cases of excessive risk taking and an excessive fixation of the prices of the stocks. This was caused by the escalation of the option grants. Also, these scandals also focussed on the problems with the different accounting practices that were followed and this opened a debate on the accounting treatment of the executive stock options. The decision with regard to the grant of the options were based upon the perceived cost of the options that were substantially lower than the economic cost. If these perceived problems of the cost have to be mitigated, then the managers must be educated and the boards must be based on the true and economic cost of the stock options. (NBER, 2015) References: Dofasco, R., Johnson, R., Zorn, T. (1990). The Effect of Executive Stock Option Plans on Stockholders and Bondholders. The Journal of Finance, 45(2), 617. Doi: 10.2307/2328674 Researchgate.net, (2015). Research Gate - Share and discover research. Retrieved 29 January 2015, from https://www.researchgate.net/...executive_stock_options.../00b4951c99cf27f6750 Small Business - Chron.com, (2015). What Are the Benefits of Employee Stock Options for the Company? Retrieved 29 January 2015, from https://smallbusiness.chron.com/benefits-employee-stock-options-company-2842.html www.nber.org, (2015). THE TROUBLE WITH STOCK OPTIONS. Retrieved 29 January 2015, from https://www.nber.org/papers/w9784.pdf