Disadvantages And Disadvantages Of Employee Stock Options On Stock Price

control over the company. Also, as we discussed in the cash option, share price will

Compensation systems can take on many forms, all of which have positives and negatives related to it. However, certain components are noted to be determinants of solid compensation plans. One agreement of a solid compensation system is the use of incentives. “Clearly a successful companies set objectives that will provide incentives to increase profitability” (Needles & Powers, 2011). Incentive bonuses should be measures that the company finds important to long-term growth. According to Needles & Powers (2011) the most successful companies long term focused on profitability measures. For large for-profit firms, compensation programs should offer stock options. The interweaving between the market value of a company’s stock and company’s performance both motivate and increase compensation to employees As the market value of the stock goes up, the difference between the option price and the market price grows, which increases the amount of compensation” (Needles & Powers, 2011). Conclusively, a compensation plan should serve all stakeholders, be simple, group employees properly, reflect company culture and values, and be flexible (Davis & Hardy, 1999; The Basics of a Compensation Program).

This paper provides an overview of the current debate and the theories that attempt to explain executive remuneration disclosure. Attention is given to underlying accounting theories such as Positive Accounting Theory, Normative Accounting Theory, Stakeholder Theory, Legitimacy Theory, Institutional Theory, Public Interest Theory, Capture Theory and Economic Interest Group Theory.

To begin with, it is clear that the management team including CEO and senior level managers would benefit from a healthy bottom line during their tenure, as their compensation packages typically are structured to be linked to company performance as a way to align management and shareholders’ interests (Bergstresser & Phillipon, 2009). Company’s profitability matters to shares price. The more profitable a company is, the more attractive it will be for the potential investors.

Results on worker retention suggest unions decrease turnover among lower-productivity workers, but increase it among higher-productivity workers” (Frandsen, 2010). Another way to retain top talent is to offer stock options. An analysis of 229 companies found that “only 5.5 percent of the companies with unions have broad-based stock options, while 12 percent of the non-union companies did” (Performance Effects of Options in "New Economy" and Unionized Companies, 2011). The study also found that unionized stock option companies improved productivity relative to non-stock option companies, but that compared to non-union stock option companies, the unionized companies did somewhat worse.

Financial management is a work plan that details the revenue and expenses of a company. Financial decisions are strategies that achieve the financial objectives of a company that include capital budgeting, capital structure, and working capital management. Modigliani and Miller (1958) received the Nobel Prize in economics for their study of the relationship between capital structure and corporate value, with and without corporate tax. Whether financial management decisions influence firm value is still debated daily because there are plenty of uncertain factors. In this paper, I intend

Since firms incur the re-purchase option by offering $20 cash for each stock bought back, the number of outstanding shares will be reduced. The Earnings per share will increase leading to an increased stock price.

In September of 2014, there was America’s first diagnosis of Ebola in Texas, spiking alarm throughout the country. Many people were afraid they would get Ebola, and some people even decided to take extreme precaution. That’s where Lakeland Industries comes into the picture. Because of the large amounts of hazmat suits being bought from Lakeland, the stock price began to increase. The price of the stock started at $3.62, but boosted up to $15.32, about a thirty percent gain that shows just how much of an affect the Ebola scare had on the stock price. Before, the price of Lakeland Industries had been consistently low, ranging from $5 to $7, but as people became more aware of the threat of Ebola going into October the stock price got all the way up to $29. This spike in price increase isn’t caused by just the company itself, but the fear of Ebola in investors. This is shown by the price of Lakeland Industries hitting “a high of $29 earlier in the month before quickly crashing below the $15 level” after people realized that Ebola would not affect them and the need for hazmat suits quickly diminished. Because of the Ebola scare, the stock price of Lakeland Industries surged, but it would not last because of the people understanding that the likeliness of an Ebola outbreak is slim. This event is the foremost reason for the price of Lakeland Industries’ (LAKE) quick rise to the top.

b) ESOP’s: Incentives that allow the employees to buy the share of the firm they are working at lower rates which creates the sense of ownership.

Most important, the employees can earn stock, which gives them voice within the company to make pertinent decisions.

For each share purchased with the employee’s own funds, a French bank would lend them funds to purchase nine additional shares (up to 500 shares total). Employees would then place all ten shares in the bank’s custody as collateral for the loan. Employees would be prohibited from selling the shares for 4.5 years except under unusual circumstances. The loan could be repaid at the end of 4.5 years either from the employee’s pocket or through sale of the shares. BT would guarantee employees a minimum of 1.25 times the money employees put up to purchase the shares. In exchange for this guarantee, BT would take 1/3 of any price appreciation at the end of 4.5 years over the public offer price of 150Ffr per share. In terms of financial contracts this would be a combination of options (employees’ option to sell stock after 4.5years) and futures (BT’s obligation to pay 1.25 times employees’ personal contribution). This alternative seems to be fair for employees in the case of price depreciation, because they will have a secure profit. If shares appreciate, they will earn 33.7% of return per share less than in A1, but will also earn it on a higher amount of shares. Therefore, it is important which effect prevails. Moreover, with BT’s proposal employees lose share ownership, unless they decide to pay with their own resources.

Besides that, CSI also offer the stock options to all the employees in the first year they joined the company but the value of stock option component varied depending on tenure and position in the company. Employees will be given four years from the offered date to buy or not to buy the stock and it is limit to 25% per year. It will be expired 10 years after granting or within 30 days of leaving the company. However, CSI has not yet implement the formal plan for annual stock option grants. Hence, the grants would be awarded based on an ad hoc basis to ensure that employees’ stock holdings were in line with their current position and contribution to the company. Stock option actually is an effective motivational tool but not for CSI, this is because their employees do not understand the options and does not know how to value them. Moreover, the options were become worthless since the company is not a public company. In another word, CSI were lack of formalization to control stock options and does not give very clear direction to employees about the targeted areas and results through compensation system (stock option). Apart from that, stock option

Infosys provides strong property rights to its employees by providing employee stock option plans. Top management were given profit sharing plans based on the company performance as an incentives. ESOP’s usually guarantee long term employment. But later Infosys withdrew the stock options plan due to various complexities and accounting challenges.

Stock options provide a financial incentive to employees. If the company does well, then the employees benefit financially. Providing this benefit has the effect of the employee having a vested interest in how the company performs; therefore, the employee will work hard, do their best work, and stay

Jensen and Meckling divided shareholders into internal investors which has management right and external shareholders investors without vote right. Theoretically, the more the internal shareholder’s share the higher the firm value. The researchers also defined firm value as a function of ownership structure. Because ownership structure has links with corporate governance, it can have both positive and negative effects on corporation governance (Jiang 2004).