Question

G2) In looking at theories and theory development, what we are trying to do is explain why institutions, organizations and individuals do certain things; to try to explain why individuals and organizations behave in certain ways. Let’s look at an example relevant to Corporate Governance. Why does an organization grant stock options to the members of its top management team? Why do you think a company would do this?

Answer 1

Answer: Granting stock option is a very commonly used practice in all types of firms. In this an employee or the members of the top management are granted with a right to purchase company’s share at a certain price within a certain point of time. At times the people from top management are simply allotted these shares as a reward for their performance or as a part of their compensation package. This practice is mainly used by the companies as tool for compensation and incentive. One major advantage that is claimed for offering the stock options to the top management is that it ties their compensation with their performance. If the company performs well, the stocks of the companies will go up and if the performance is bad the stocks will go down. This acts as a mechanism that encourages the top management to work hard in order to increase their compensation. Thus stock options are granted by the companies to their top management so that they may continuously work hard to increase the value of their stock options.