Question

What are the advantages and disadvantages of share options as means of executive compensation?

Answer 1

Advanatges to the company:

Minimize agency cost by aligning interests with the shareholders and giving a sense of ownership to the executives

Cost effective and easy and relieve cash flow pressure and compensate for lower salaries;

Tax benefits

Increased staff retention

Recruit/retain key employees

Given it awards them opportunity to repa some of financial rewards, employees' dedication might increase

Disadvantages:

Executives might get high levels of compensation despite delivering mediocre results

Valuation is difficult

Dilution might be costly to the existing shareholders

Excessive Risks-Executives might take some actions which benefit the share price in the short term but may be harmful for the company in the long term

Dependence on others: Even if an individual performs well but due to external factors or due to other members of the team, the output is mediocre due to which he might not get his deserving reward.