A stock option plan is part of the compensation of senior employees and top managers of public companies. Such a plan assigns the executives included in the group of beneficiaries purchase options (calls) to the shares of their company and aims to motivate them through substantial allocations. As a rule, the options and, in some cases, the shares later drawn upon when exercising, may not be sold within a medium period (lock-up period). When the plan contains specific conditions and parameters, it is referred to as stock appreciation rights.
In many companies it is the practice to reward and motivate employees at all levels through bonuses or bonus payments. Of course, there are also other ways of rewarding multiple efforts, success or commitment and loyalty and at the same time creating an incentive with the reward. For example, empirical studies show that so-called professionals appreciate a sabbatical - a free "semester" - in order to be able to continue their education and increase their own value on the job market. Such a system is required to have four properties:
1. It must be easy to understand and transparent
2. The premium or bonus should be linked to conditions that the person concerned can actually influence with his behavior and his personal decisions at work
3. The type of influence is intended to promote the ultimate goal
4. Das System soll die Kreditfähigkeit nicht schmälern, Gewinn und Cash flow möglichst wenig belasten und jedenfalls per Saldo nicht den Wert der Unternehmung verringern
For top managers, in contrast to the diversity mentioned above, one scheme is required above all: The top managers are offered purchase options on the shares of the stock corporation concerned as part of the compensation. The view is widely shared that, if a stock option plan provides for substantial allocations, top managers themselves think like shareholders and behave in the interests of the shareholders' objectives, i.e., take measures that economic experts are expected to do they lead to price increases on the stock exchange. Option programs make little sense for employees for whom there is little direct responsibility between their decisions at work and the stock market price and who can be transparently communicated.
The generally assumed effectiveness of stock option plans has, however, been strongly questioned in the course of theoretical studies. The examinations indicate various points:
1. Although it is not very plausible at first glance, shareholders should ensure that it is not the market value of equity capital that is increased, but the total value of the company, that is, the sum of equity (valued close to the market) and borrowed capital. The reason: If top managers only pay attention to the market value of equity through options, they could initiate short-sighted measures that would be to the detriment of lenders. However, the lenders would recognize this after some time and demand compensation later.
2. With a stake in equity, the top managers included in the stock option plan are exposed to market fluctuations in price formation, which are due to the economy, interest rates and sentiment. Managers cannot influence these fluctuations with business decisions. You will then undertake a hedge against these market influences. However, the hedging could go so far that the managers can protect themselves against price drops that they cause themselves. This would jeopardize the intended effect of the option plans.
The options assigned to the top managers are either bought on the stock exchange as securities for the account of the company or those payments are contractually guaranteed that would be associated with options. In this sense, many stock option programs are based on virtual options. Because of the actually low level of transparency, critics have already pointed out that many companies no longer belong to a large number of companies that are not exactly known.