Stock Options One way to distribute

Stock Options One way to distribute stock to employees is to grant them stock options—the right to buy a certain number of shares of stock at a specified price. (Purchasing the stock is called exercising the option.) Suppose that in 2016 a company’s employees received options to purchase the company’s stock at $10 per share. The employees will benefit if the stock price rises above $10 per share because they can pay $10 for something (a share of stock) that is worth more than $10. If in 2021 the stock is worth $30, they can exercise their options and buy stock for $10 a share. If they want to, they can sell their stock for the market price of $30, receiving a gain of $20 for each share of stock. Of course, stock prices can also fall. If the 2021 stock price is only $8, the employees would not bother to exercise the options.Traditionally, organizations have granted stock options to their executives. During the 1990s, many organizations pushed eligibility for options further down in the organization’s structure. Walmart and PepsiCo are among the large companies that have granted stock options to employees at all levels. Stock values were rising so fast during the 1990s that options were extremely rewarding for a time. Some studies suggest that organizations perform better when a large percentage of top and middle managers are eligible for long-term incentives such as stock options. This evidence is consistent with the idea of encouraging employees to think like owners.27 It is not clear whether these findings would hold up for lower-level employees. They may see much less opportunity to influence the company’s performance in the stock market. Recent scandals have drawn attention to another challenge of using stock options as incentive pay. As with other performance measures, employees may focus so much on stock price that they lose sight of other goals, including ethical behavior. Ideally, managers would bring about an increase in stock price by adding value in terms of efficiency, innovation, and customer satisfaction. But there are other, unethical ways to increase stock price, such as by tricking investors into thinking the organization is more valuable and more profitable than it actually is. Hiding losses and inflating the recorded value of revenues are just two of the ways some companies have boosted the price of their stock, enriching managers until these misdeeds come to light. Several years ago, when stock prices tended to be high, some companies “backdated” options, meaning they changed the date or price in the option agreement so that the option holder could buy shares at a bargain price (this practice may be illegal if done secretly).