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With reference to the relationship between stock prices and options values, explain what boards of directors...

With reference to the relationship between stock prices and options values, explain what boards of directors are trying to achieve when they award CEOs options as part of their executive compensation packages.

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By awarding the CEOs options, the BoD is trying to link the earnings of the CEO to the performance of the company stock. The call options will only be valuable to the CEO if the current market price is above the strike price of the option. Hence, the CEO will always work towards improving the stock price of the company which would in return benefit all shareholders of the company. At the same time, if the CEO does not perform well, the CEO does not benefit from exercising the options. Hence, Options are given as an incentive to the CEOs and restrains them taking any decision which would adversely affect the stock prices of the company.

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