Wednesday, May 26, 2010

Bodie on Employee Stock Options

Bodie Matt Bodie (St. Louis University) has on Jotwell's Worklaw section his essay, "Deconstructing Stock Options," which reviews David Walker's, "The Non-Option:  Understanding the Dearth of Discounted Employee Stock Options."  From his introduction:

In “The Non-Option,” David Walker expertly dissects one of the puzzles of employee stock option compensation: why stock options are always granted at the then-current market price for the stock, resulting in “at-the-money” options.  If parties could tailor their compensation packages to individual needs and desires, one would expect that at least some firms would agree to give their employees stock options that had an exercise price lower than market price (known as “in-the money” options).  Indeed, the desire for in-the-money options was so strong that hundreds of companies essentially created them through illegal option backdating.  Recent changes to accounting rules were thought to have dampened the disparity in regulatory treatment between at-the-money and in-the-money options.  Walker’s article, however, explains how tax law has stepped in to continue this familiar bifurcation in treatment.

As Matt also emphasizes, stock options are increasingly important for many types of employees--not just executives--and is worth paying more attention to.  Of course, he explains it much better than that, so check it out.


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