Question

Why would an annual salary of $500,000 and a stock option package for a total of 250,000 shares with 50,000 shares maturing at the end of each of the next five years be a better corporate governance choice than an annual salary of $500,000 and a stock option package of 250,000 shares that matures in five years? Show working if possible.

Answer 1

The choice of offering an annual salary of $500,000 and a stock option package for a total of 250,000 shares with 50,000 shares maturing at the end of each of the next five years be a better corporate governance for the following reasons:

1. The human resources team in a company oftens spends hours to get the best compensation package for an executive role and this program will align best with the shareholders interests with that of the firm's managers.

2. A firm manager would prefer an annual flow of stock options rather than wait for 5 years and is most likely to be binded by the company.

3. There can be potential fraud if the stock matures in 5 years since the managers may be tempted to insider trading or present the financials in a way that increases the stock price and they gain out of it.

P.S. This has no calculations and is a corporate governance question.Any doubt please comment.