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.Yet the CEO share of the total amount of stock options granted actually fell from a high point of about 7 percent in the mid-1990s to less than 5 percent in 2000-2.Indeed, by 2002 more than 90 percent of stock options were being granted to managers and employees.And, according to some very vocal critics, they motivate corporate leaders to pursue short-term moves that provide immediate boosts to stock values rather than build companies that will thrive over the long run.As the use of stock options has begun to expand internationally, such concerns have spread from the United States to the business centers of Europe and Asia. The root of the problem lies in widely held misperceptions concerning the cost of granting such options, according to Brian Hall and Kevin Murphy writing in The Trouble with Stock Options (NBER Working Paper No. Stock options are compensation that give employees the right to buy shares at a pre-specified "exercise" price, normally the market price on the date of grant.
"No shareholder should need a machete and a pith helmet to go hunting for what the CEO makes," said Christopher Cox, chairman of the Securities and Exchange Commission, in a speech last week to the New York Financial Writers Association.
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.
Principal is referred to the stockholders and the agents are the executives who work for the stockholders.
Although stockholders are the owners of the company to whom the executives are accountable, their actual powers are restricted except in the case of those corporations where stockholders are also the directors of that corporation.