Hall and Murphy argue that, in many cases, stock options are an inefficient means of attracting, retaining, and motivating a company's executives and employees since the company cost of stock options is often higher than the value that risk-averse and undiversified workers place on their options.In regard to the first of these aims - attraction -- Hall and Murphy note that companies paying options in lieu of cash effectively are borrowing from employees, receiving their services today in return for payouts in the future.But risk-averse undiversified employees are not likely to be efficient sources of capital, especially compared to banks, private equity funds, venture capitalists, and other investors.
An option gives a person the right to buy stock in the future at a fixed price -- usually the price on the date the option is granted.
Between 19, the value of the options granted by firms in the S&P 500 rose from an average of million per company to 1 million per company (with a high point of 8 million reached in 2000).
Over this period, CEO compensation skyrocketed, largely fueled by stock options.
That undercuts the main intent of stock options: to motivate executives to increase the company's stock price.
The good news is that, just as Enron and other accounting scandals of the late 1990s prompted the tough Sarbanes-Oxley rules for corporations, the stock-options scandal is helping spur strict regulations on executive compensation.