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EMPLOYEE STOCK OPTIONS
Compensation experts must always consider the alignment of employees' goals with those of the organization. This is particularly true for top executives.
In large public corporations, this consideration is highlighted by the split between ownership (the stockholder) and control (management).
One answer to mitigate this problem comes in the form of employee stock options.
| Employee stock option | A right given to an employee to purchase a specified number of shares of the organization's stock at some future date at a specific price. The employee doesn't have to put any money down – he or she is given (or granted) the option. |
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In effect, the employee stock option is a bonus for good performance.
The desire is to align the executive's goals with the:
- organization's goals
- AND
- stockholders' goals
Q: Why not just provide the employee with a cash bonus?
A: There are several reasons:
- Stock options require no immediate cash outlay by the organization. This allows cash to be used for non-wage factors in the organization.
- The option, given the delayed time dimension, focuses the employee on the long term. This is a major problem with bonuses that are based on the current year's performance.
- The eventual value of the option varies with the stock price, aligning the employee's reward with the stockholders' major interests.
- Due to the delayed time frame, stock options provide a type of "golden handcuff" that keeps employees with the organization.
Memory Jogger
Note: Memory Jogger questions are not scored. They serve only to help you remember some of the course material covered thus far. You must select the correct answer in order to proceed to the next section.
Stock options were meant to align employees' goals with a company's: