Explain the concept ‘executive stock options’. What are the advantages and disadvantages of ‘executive stock options’?

Executive stock options are a form of performance-based compensation for senior employees, such as company executives and directors. They give the holder the right, but not the obligation, to buy a certain number of shares in the company at a pre-determined price over an agreed period of time. The idea is that by incentivizing executive success with stock option rewards, corporate performance will be improved and shareholders’ interests more effectively protected.

Advantages:
• Executive Stock Options encourage long-term thinking, leading to higher returns on investments and less risk taking behaviour.
• It helps executives to focus on creating shareholder value instead of short term gains.
• It provides incentives for top management teams to work together towards achieving common goals.
• By tying executive pay to share prices, it aligns them with shareholders’ interests while rewarding their efforts in pushing up the share price – thus providing necessary motivation for better performance.
• In simple terms, ESOs allow companies to compensate senior staff without spending any cash or incurring debt that comes with traditional bonus plans or salary increases.
Disadvantages:
• There is a lack of transparency associated with Executive Stock Options since they do not show up as an expense on financial statements – this can lead to potential mismanagement opportunities due to lack of oversight by investors/shareholders.
• Executives may take decisions which maximize their personal benefit from ESOs rather than what would be best for the company overall – this could create conflicts between personal gain and corporate objectives if not managed properly (e.g., excessive risk taking).