Evaluate Effectiveness of Stock Option for Incentive

Course: HRM 6010-Total Compensation

Professor: Kathleen K. Collins

Name: Yin PENG

Title: Evaluate effectiveness of Stock Option for Incentive

Time: Feb 02, 2012

One of our four policies in compensation is contribution, which helps HR professionals keep the compensation program fair. And emphasis on employee’s contributions is an important policy decision since it directly affects employees’ attitudes and work behaviors (Milkovich, Newman, & Gerhart, 2011, p. 20). Among all employees, executive officers are the most important, because they have the right to access the resources that can decide the wellness and life of one company. So the incentive plan that aim to recognize the contributions of executive officers are extremely important for us when discussing Compensation plan for Employees’ contribution. Thus here I would like to discuss the most common incentive tool when motivating senior managers—stock options.

What is stock option?

Stock option is a financial derivative contract that provides a party the right to buy or sell an underlying at a fixed price by a certain time in the future (Hull, 2009, p. 8). There are normally two types of options—call option and sell option. But in our question, stock option only means call option, because sell option will impossible to be used to motivate executive officers. Therefore, definition of stock option in our discussion should be the right granted by shareholder to executive officers to buy one company’s stocks at certain fixed price for a certain duration of time, and such price normally are below the current market price of company’s stock, especially for public traded companies. By granting such right, shareholders motivate executive officers or senior managers, who have enough power to change company’s destiny, to increase the price of company’s stock, finally resulting shareholder’s value increase. One major assumption of granting options to senior managers or executive officers is that the company’s...