At the recent shareholders' meeting, the CEO of a small bank proposed a plan to offer each of its employees 250 incentive options for Class A common stock. The key provisions of the plan are that employees must exercise the options between January 2004 and December 2007, and if an employee terminates his or her employment with the bank (or is terminated), the options are no longer exercisable. One shareholder feverishly objected to the plan, claiming that such a move would dilute the value of the outstanding shares. As CEO, how would you defend the stock option plan to the shareholders?
Though stock option involves dilution of ownership, it is the best way handling agency problem and rewarding employees. Stock option involves giving right to an employee to buy certain number of shares at a fixed price for specified period. It is more than dilution, it is sharing of ownership to achieve goal ...
This explains the importance of stock option plan.