Case studies of the effects of stock option grants

Abstract

Executive compensation and the use of stock option grants will again be the focus of attention following the June 15, 2005 Financial Accounting Standards Board implementation of Financial Accounting Standards 123, Expensing Stock Options. Not since the increasing use of stock options in the past decade and the following corporate governance scandals, will we see such a significant effect on the design and implementation of executive compensation packages. In this paper we examine the current theories surrounding the grant of stock options, provide case evidence supporting such theories and introduce a model focusing on the career concern, forced exercise effect of stock option grants. Through our case research, we conclude that no one current theory is able to explain all cases, and that in general, current stock option design is not efficient due to the resulting agency problems, the low perceived value and less risk-taking by executives.