In 2002, the head of CBS (a broadcasting company) received $200m in
income, of which only $9.8m was from salary and bonuses. The rest was
from option gains! Similarly, the head of Walt Disney earned $576m; the
majority of which was from stock options. What percentage of these
amounts reflected compensation for the actual value of services rendered
and what percentage was just gratuitous payments? Various proposals have
been put forward to resolve this question. Some argue that if the value of an
option reaches a certain threshold, a higher exercise price should be applied
(similar to a progressive tax).
What if the economic climate worsens? A manager might realize that à
recession has damaged her company's stock price so badly that her options
are worthless. To ensure that the incentive is not lost entirely, it has been
proposed that the exercise price be reset in certain conditions.
Another concern is that the stock price may be artificially inflated to
enable managers to cash in their options. To guard against this scenario
many companies require managers to hold stock acquired through options
for several years. Recently enacted laws in some countries require
companies to purchase treasury stocks when they issue stock options.
When the options are exercised, the company will not have to buy stock to
sell to its managers, so the shock on the stock's demand and price can be
avoided.
Finally there is the accounting question. Compensation to managers is a
business expense and must be reflected as such on a company's income
statement. Unfortunately traditional options are not treated as conventional
business expenses. If an option is expensed at the issuing date, its value
may still be zero. But if the expense is recorded at the due date the option,
that may be long after the managers' services are performed. Accounting
rule-makers have proposed that option expenses be recognized at the end of
