Suppose as part of a hiring plan you were awarded 1,000 stock options at the money at

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Question:

Suppose as part of a hiring plan you were awarded 1,000 stock options “at the money” at Dogs R Us on March 10, 2009. The options are standard employee options and vest 20% per year for five years, and the options expire after 8 years. The stock price for Dogs R Us has been as follows:

Date Price Date Price

3-10-09 $30 3-10-15 $35

3-10-10 $40 3-10-16 $25

3-10-11 $45 3-10-17 $28

3-10-12 $52 3-10-18 $30

3-10-13 $50 3-10-19 $40

3-10-14 $40 3-10-20 $45

Part A. If you wanted to exercise all 1,000 of your options on March 10, 2010, how much money would you earn? [3 points]

Part B. Say you didn’t exercise your options in 2010, and instead wanted to exercise all 1,000 of your options on March 10, 2014, how much money would you earn? [3 points]

Part C. Rather, say you waited again, and want to exercise all 1,000 of your options on March 10, 2016, how much would you earn? [3 points]

Part D. Last, again you waited and now want to exercise all 1,000 of your options on March 10, 2018, how much would you earn? [3 points]

Part E. Dogs R Us is concerned that its employee stock option plan is not as effective at reducing employee turnover and increasing employee performance as it could be. Given your excellent performance in Compensation and Benefits this semester, the CEO of the company has come to you for advice. Specifically, she wants to know what changes she should make to the employee stock options program to: 1) reduce employee turnover, 2) increase the link between employee pay and firm performance, and 3) encourage employees to behave more like company owners. Discuss three possible ways to improve stock options (one recommendation should address each issue above). These recommendations should be based on class readings. Please make sure to cite the readings you use to support your recommendations. [9 points]