The Trouble with Stock Options

Brian J Hall, Kevin J Murphy
2003 Journal of Economic Perspectives  
The trouble with options is that too many options are granted to too many people. Most options are granted below the top-executive level, and options are often an inefficient way to attract, retain and motivate executives and (especially) lower-level employees. Why, then, are options so prevalent? We discuss several explanations including changes in corporate governance, reporting requirements, taxes, the bull market and managerial rent-seeking. We also offer an alternative hypothesis that we
more » ... ypothesis that we believe explains the over-use of options and several apparent puzzles: boards and managers falsely perceive stock options to be inexpensive because of accounting and cash-flow considerations.
doi:10.1257/089533003769204353 fatcat:4xaq4vck3jfetksxml4svnru3a