Stock option grants have come to dominate the pay of top executives. But while they've made many people wealthy, their impact on business in general remains controversial. Critics say options motivate corporate leaders to boost stock values in the short run rather than build companies that will thrive over the long run. Drawing on an extensive analysis of the real-world impact of options, Brian Hall argues that the critics are wrong.
Option grants are the best compensation mechanism we have for getting managers to act in ways that ensure the long-term success of their companies and the well-being of workers and stockholders. But because options tend to be poorly understood, companies often end up with counterproductive plans. The author explains the three types of option plans that can be used. Fixed value plans, for which executives receive options of a predetermined value every year, are ideal for companies that set pay according to compensation surveys, but they weaken the link between pay and performance.
Fixed number plans, which stipulate the number of options executives will receive over the plan period, provide a much stronger link. The lump-sum megagrant is the most highly leveraged type of grant because it not only fixes the number of options in advance, it fixes the exercise price as well.
The type of plan must be carefully matched to the company's strategy. The article is accompanied by several exhibits, including a chart entitled "Which Plan? To download this product after your purchase, simply sign-in to hbr. Register as a Premium Educator at hbsp. Tell your instructors about the savings at hbsp. Quantity pricing discounts will be reflected at Checkout, prior to submitting your order.
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