Principal Topic

Stock option plans are becoming increasingly prevalent. The reasons that stock options are implemented are to (1) align the interests of employees with the interests of their firms and (2) help firms recruit, motivate, and retain key employees. While it is tempting to focus solely on the benefits of stock option plans, the trend towards the use of stock options involves tradeoffs. For instance, an employee may be attracted to a firm as a result of its stock option plan but never realize any financial benefits if the company’s stock price doesn’t appreciate. As a result, offering employees stock options can be like walking a tightrope. The purpose of this study is to develop a theoretically grounded list of the potential advantages and disadvantages of stock option programs.

Method

The research methodology is grounded theory, which is a qualitative research technique. To execute the study, we conducted a series of 16 interviews with employees that are participants in stock option plans, focused on the employee’ perceptions of the positive and negative attributes of their stock option programs. The common themes derived from the interviews were used to develop a theoretically grounded list of the potential advantages and disadvantages of stock option programs.

Results and Implications

The results indicated that stock option plans are very salient to employees. Employees who own options feel more like owners, feel that options motivate work performance, and in varying degrees feel like their stock options are an important part of their overall compensation plan. In addition, a common remark from the respondents is that their respective firms frequently remind their employees that they are not just employees but are also “owners.” On the downside, the respondents indicated that stock option plans can be de-motivating when they do not pan out. They also indicated that option plans are emotionally ladened and can cause individuals to experience mood swings up or down depending on the condition of the options, which can be disruptive to the normal routines of a business. The primary implication of the results is that option plans must be carefully managed, and do involve tradeoffs that managers should consider when designing their stock option programs.

CONTACT: Bruce R. Barringer, Department of Management, College of Business, University of Central Florida, Orlando, FL 32765; (T) 407-823-2673; (F) 407-823-3725; Bruce.Barringer@bus.ucf.edu