Chapter 23, Problem 1CQ

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?

Summary Introduction

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.

Conclusion

So, employee stock option should be given to the executive to improve the performance of the company.