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This paper looks at the research to date on the future of broadly granted stock options (options granted to at least half the full-time employees of a company). In the U.S., granting options broadly became popular in the late 1990s, but has lost some of its appeal in the wake of stock market declines, accounting changes, and increased shareholder concerns about dilution. The data indicate a significant minority of companies will change their plans, but a substantial majority will keep them. The data also indicate changes in accounting rules will not affect stock prices and that broadly granted options are better for corporate performance than narrowly granted options.

Stock ownership and incentive options are used by companies to retain and motivate employees and managers. These grants usually come with vesting features which require grantees to hold the assets for certain periods. This vesting requirement makes the grantee's total wealth highly undiversified. As a result, as shown by previous researchers, grantees tend to value these incentive securities below market. In this case, grantees will have a strong desire to hedge away the firm-specific risk. Facing the restrictions of direct hedges such as shorting the firm's stock, employees may implement a partial hedge by taking positions in an asset highly correlated with the firm's stock, such as an industry index. In this chapter, we investigate the effects of such a partial hedge. Using the continuous-time, consumption-portfolio framework as a backdrop, we demonstrate that the hedging index can enhance the employee's optimal portfolio holding and increase his intertemporal utility. Consequently, his private valuations of these grants are higher than that without the partial hedging. However, because the partial hedge makes the employee's total wealth less sensitive to the firm's stock price, it will also undermine the incentive effects. Therefore, the presumed incentive effects of these restricted assets should not be taken for granted.

Starting from 2003, Microsoft and many other companies have either gradually reduced or completely replaced stock options with restricted stocks in their compensation plans. This raises an interesting question: which form of compensation is better, stock or options? This chapter makes an economic comparison between the two compensation vehicles and concludes that stock is preferred to options. The backdrop of the study is dynamic asset allocation within a utility maximization framework whereby the company may go bankrupt. The incorporation of bankruptcy risk into the analysis is motivated by the recent downfalls of companies such as Enron and WorldCom.

We demonstrate that vesting requirements and bankruptcy risk can lead to significant value discounts. When the restricted stock and options have a vesting period of 5 years, and account for 50% of the total wealth, the total discount is more than 60%, out of which 20% is due to bankruptcy risk. More importantly, we find that stock is a better compensation tool than options. For a given dollar amount of grant, the higher the stock proportion, the higher the expected utility. In fact, replacing options by stock can lead to a substantial amount of cost savings for the firm, while maintaining the same level of utility for the employee. For example, when options account for 50% of the total wealth and are subsequently replaced by stock, the granting cost is reduced by about 60%. Our findings therefore provide a theoretical support for the move to stock-only style of performance compensations.

Many firms in many countries started to issue stock option schemes to their employees in the 1990s (Murphy, 1999).¹ In the course of time, the mushrooming of schemes has generated a heated public debate on the pros and cons of this compensation method. In one camp are those who argue that stock options are nothing more but a compensation mechanism by which managers transfer excessive fortunes to themselves without a real enhancement in firm performance. On the other hand, proponents underline that options provide managers and employees financial incentives to make better decisions, work harder, and share valuable information in a way that enhance firm performance. Thus, they see options – more or less– as a major innovation in managerial and personnel compensation (or more generally in human resource management). However, at the moment there is no theoretical or empirical consensus how stock options and managerial equity ownership affect firm performance in economic literature (Core, Guay, & Larcker, 2003).

This study investigates the relationship between financial participation plans, that is profit sharing, share plans and option plans, and firm financial performance using a longitudinal panel data set of non-financial listed companies for the period 1992–2009 comprising 2,216 observations. In addition, it makes a distinction between financial participation plans that are narrow based, directed to top management and executives only, and broad based, targeted to all employees. The panel data also allow us to take into account time lag effects, as profit sharing is usually said to have short-term effects while stock options and share plans are more targeted to longer term impact. Our results show that broad-based profit-sharing plans and combinations of broad-based profit sharing and share plans are positively related with many firm financial performance indicators relative to companies without these plans. However, the results consistently show negative associations between both narrow- and broad-based option plans and firm financial performance.

Agency problems are more severe for multinational corporations (MNCs) and multinational enterprises compared to their domestic counterparts. As companies develop diversified operations, their managers face more challenges. An incentive compensation structure has been designed to align the benefits of managers with those of shareholders. Additionally, corporate social responsibility (CSR) has become increasingly crucial for companies. MNCs must gain the trust of more investors to improve their corporate reputation and financial performance. CSR enables MNCs with a high sense of social responsibility to expand their investor base, reduce perceived risks, and decrease information asymmetry. Our empirical findings reveal that Taiwanese MNCs can enhance their performance by implementing cash-based compensation and pursuing CSR activities.

Taking an international comparative approach, this chapter investigates the variance in the adoption of employee share ownership and stock option arrangements across countries. In particular, we investigate the influence of multinational enterprises (MNEs), industrial relations factors, HRM strategies, and market economies on the adoption and spread of the arrangements across countries. We find that industrial relations factors do not explain the variance in adoption by companies in their respective countries. MNEs and HRM strategies are important drivers of adoption. Market economy does not moderate the influence of MNEs on adoption, suggesting that MNEs universally apply the arrangements across borders.

This exercise exposes students to the accounting for stock option modifications and option service and performance conditions, requiring research in the Financial Accounting Standards Board (FASB) Accounting Standards Codification and the use of the Black-Scholes option pricing model.

Students identify and apply accounting standards to account for stock option plans, stock option modifications, acquired stock option plans, and service and performance conditions that relate to stock option plans. Indirect student feedback suggests that students view the exercise as valuable. Comments include that the exercise reinforces and expands their knowledge of real-world stock compensation plans. Direct assessment data using grading rubrics finds that most students meet instructor expectations.

The exercise enhances critical thinking skills, increases professional research practice, and improves written skills. It introduces students to common real-world events and reinforces their learning related to stock compensation.

Compensation systems have been shifting away rapidly from a fixed-wage contractual payment basis in many nations around the world (Ben-Ner & Jones, 1995). Particularly prominent is the explosion in the use and interest in employee financial participation schemes, such as profit sharing, employee stock ownership, stock option, and team incentive (or gainsharing) plans. With the rising use and interest in such employee financial participation schemes, many studies have examined their effects on enterprise performance in industrialized countries.¹ Most prior studies consider either profit sharing plans (PSPs) in which at least part of the compensation for no executive employees is dependent on firm performance (typically profit)² or employee stock ownership plans (ESOPs) through which the firm forms an ESOP trust consisting of its nonexecutive employees and promotes ownership of its own shares by the trust.³ Moreover, an increasing number of firms (in particular “new economy” firms) are extending the use of stock option plans (SOPs) to include nonexecutive employees in recent years.⁴ Finally, with the rising popularity of “high-performance workplace practices (notably self-directed teams),” more firms are introducing team incentive plans (TIPs), which makes at least part of the compensation for employees dependent on performance of the team or work group to which they belong.⁵