Briefly describe the use of stock options in a compensation plan. What are some potential problems...

Briefly describe the use of stock options in a compensation plan. What are some potential problems with stock options as a form of compensation?

Expert Solution

Stock options are known as the one of the methods adopted by the companies which is used to compensate the
employees. In this system the employees are offered the stocks of the company. These stocks are the one which
issued at the predetermined price and this price is called strike price. There is also a known as the time frame
attached to the stock options. The stock options are known for helpful in promoting the long term
relationship or the employees with the company and which facilitate a high level of commitment
among the employees. Following are the very few potential problems with stock options

a) It may lead the managers to do manipulations/window dressing in the preparation of financial statements so that the price of the stock can increase.

b) The managers to whom stock options will be issued will be facilitated with high compensation irrespective of the poor performance of the business/operations of the company.

jeff jeffy answered 7 months ago

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