ON THE PROS AND CONS OF EMPLOYEE STOCK OPTIONS: WHAT ARE THE ALTERNATIVES?

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Abstract

Despite theoretical validity, there is mixed empirical evidence on whether employee stock options align the interests of management and shareholders by turning managers into owners. Yet, recent accounting scandals, excessive payouts, and the public’s call for a proper recognition of stock option grants have produced considerable debate in boardrooms and the financial press about the desirability of using stock options. This paper provides an overview of the empirical research in the field and discusses the advantages and disadvantages of using stock options as part of an employee’s compensation package. In light of the recent accounting scandals, regulatory bodies have been hard pressed to change the accounting treatment and recognition of stock options. As a result, practitioners and academics are increasingly on the lookout for alternative forms of compensation tools. To aid in the ongoing discussion, we propose a number of alternative compensation tools that help alleviate some of the problems inherent in stock options, while still rewarding a manager for his performance and aligning management and shareholder incentives. While there is no clear-cut answer as to what compensation tool is best, our study should provide corporate managers with the necessary insights that are needed to choose the method that most closely meets their objectives. In addition, our study aims to open the door for further academic discussion that is required to address a number of questions that remain unanswered in this area.

Keywords: Stock options, Executive compensation

How to cite this paper: Pukthuanthong, K., & Walker, T. (2006). On the pros and cons of employee stock options: What are the alternatives? Corporate Ownership & Control, 4(1-2), 266-283. https://doi.org/10.22495/cocv4i1c2p3