Question

1. Do you think that stock options actually motivate employees to work for the long-term good of the company?
2. Do you think that stock options inadvertently encourage managers to engage in questionable accounting activities, such as earnings management, to artificially increase the company’s net income and thereby the value of the executives stock options?
3. Do you agree or disagree with the four ethical arguments summarized above and contained in more detail in the article by Raiborn, Massoud, Morris, and Pier? Explain why.
4. Should a board of directors approve repricing or backdating stock options for outstanding executives whose current stock options are underwater due to uncontrollable economic factors, and who will be lured away unless some incentives to stay are created? What other incentives might work?

Employee stock options allow company executives to buy shares of their company at a specified price during a specified time period. They are given to executives as a form of noncash compensation. The option or “strike price” is normally equal to the market price of the stock on the day that the option is granted to the employee. The stock option is intended to motivate the executive to increase the stock price of the firm. If the stock rises, the investor is pleased. If the stock rises, the executive exercises the option, buys the stock from the company at the strike price and then immediately sells those shares on the stock exchange at the current (higher) market price to obtain a cap- ital gain. This is considered to be a win-win situation. Both the investor and the employee gain from the increase in the market price of the company’s stock.



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  • CreatedOctober 28, 2014
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