Question

If you had to name the 3 most significant shortcomings/disadvantages to US companies offering stock options to compensate CEOs, what would they be?

Answer 1

Employee Stock Options - It is a way of compensating the employees by giving them the option to buy the shares of the company at a fixed rate or at a discount

Disadvantages of Stock Options are

1. Unnecessary Risk
Many times CEOs take unnecessary risks in order to increase the stock price of the company for a short term period which may not add any value to the firm in the long term. This will help the top executives to exercise their options and reap benefits of the increase in the stock price in the short term.
Examples of unnecessary risks are mergers and acquisitions, diversification, etc.

2. Dilution
By giving stock options, the earnings per share of shareholders get diminished due to the issue of shares to the executives at the time of option being exercised

3. Employees may get dissatisfied
At the time of options being offered, the future prospects of the company would be good and hence the employees would take that option instead of cash, however, at the time of exercising the options, the future prospects might have degraded which would lead to lower share price and hence the employee doesnt exercise the options and thus feels dissatisfied by foregoing the cash by taking the stock options.
Dissatisfied employees will lead to further underperformance of the company.