Discuss the risk that executive stock options pose to current shareholders. In structuring and awarding these optons, what are the possible outcomes that could come from the option program?
Employee Stock Option Plan, is a mechanism by which employees of a particular company are entitled to buy, at a 'fair' value, the stock of the company they work for. Thus it is an option to buy the company's share at a certain price. This price which could be the market price or some other price. Normally, to make an ESOP attractive, the option price is lower than the market price.
The option to acquire shares is generally exercisable over a period of time, known as vesting period (generally ranging from 1 to 5 years). Since options lapse if the employee leaves employment before the vesting period is over, ESOPs work as an incentive for the employee to stick around for that time
ESOPs are a good motivation tools. The knowledge that if he does well, the company will prosper and eventually the shares will yield a higher return motivates the employee to put in more efforts. This has a multiplier effect since with highly motivated employees, the chances of the ...
The solution discusses the risk that executive stock options pose to current shareholders.