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Critically Evaluate The Use Of Share Option To Align Directors' Interests With Shareholders' Interests.

2572 words - 10 pages

IntroductionEnthusiasts have long argued that share option schemes provide management with a powerful motivation tool. Stock ownership aligns employee and shareholder interests will strengthening employee levels of commitment. In an increasingly competitive business environment, options are a way to attract and retain key employees such as managing director or Chief executive officer (COE). According to Whittker, employee must act and behave as genuine shareholders to equate investor and shareholder interests (Hayward, 2001, p. 8). This essay firstly discusses the notion of share option, explain how share options align manager and shareholders interest, and finally confer possible problems with share options.What is share option?According to Ross et al option is a contract that gives its owner the right to buy or sell some asset at fixed price on or before a given date. Options are a unique type of financial contract because they give the buyer the right, but not the obligation, to do something. The buyer uses the option only if it is profitable to do so; otherwise the option can be thrown away (Ross, Thompson, Christensen, Westerfield & Jordan, 2001, p. 687). The asset involved in an option could be anything. The options that are most widely bought and sold are share options. These are options to buy and sell shares. A company option is a corporate security that gives the holder the right, but not obligation, to buy shares directly from a company at a fixed price for a given period. Each company options specify the number of shares that the holder can buy; the exercise price and the expiration date. Company options usually have much longer maturity periods (Ross et all p. 711).Share option aligns manager and shareholder interestAs to the agency theory, individuals are rational and maximize their utility (Wong, 1988, p. 23). Types of compensation or remuneration packages are provided by company to managers to minimize conflict of interest between managers and shareholders. Enthusiasts have long argued that share option schemes provide management with a powerful motivational tool. Stock ownership would align employee and shareholder interests thus strengthening levels of commitment between them. In an increasingly competitive business environment, options are a way to attract and retain key employees such as Chief Executive Manager (COE). The ultimate objective of a corporation is to maximize shareholder value, but at issue is how this is to be achieved? The answer lies in precisely how employees are motivated so that their interests coincide with those of shareholders. Stock options can be a valuable motivational mechanism to align the CEO's interests with those of the shareholders. For example, Howard Solomon, CEO of Forest Laboratories, received a total compensation of $148.5 million in 2001. This represented $823,000 in salary, $400,000 in bonus, and $147.3 million in stock options that were exercised. However, shareholders also did...

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