Subscribe
Share
Share
Embed
The real impact of corporate governance isn't about compliance or structure or policies, it's about the conditions that impact decision-making. Sound-Up Governance features fresh perspectives to help boards and executives to be a bit better tomorrow than they were yesterday.
There are lots of definitions in Ground-Up Governance that *seem* boring but are really pretty interesting. Stock options really are boring, sorry. Stock options come in all kinds of shapes, sizes, and flavours, but for the sake of this definition we’re talking about the type of option that tends to be used as executive compensation (for the nerds out there, we’re specifically talking about call options with a strike price that’s roughly equal to the share price at the time of grant). Here we go.
Remember that part of the point of executive compensation is to get executives to do things that shareholders like? And that the main thing that shareholders like is for the share price to go up and up? Well, when we give executives stock options, it basically means that we are giving them the “option” to buy shares in the future, but they will only have to pay today’s share price. In stock option parlance, that means today’s share price is the “strike price” or “exercise price”. Let’s imagine that today’s share price is $1 and I give you one stock option. If the share price goes up to $1000 in five years, you can buy one share, worth $1000, for only $1. That means you basically made $999. In short, a stock option is an incentive for executives to do things that make it more likely for share prices go up in the future.
There are lots of reasons why stock options are even more boring and complicated than that (try googling exhilarating stuff like “stock options tax” and “stock options dilution” if you really want some inspiring reading). There is one important thing to consider that’s sorta not boring, though. Stock options typically have an expiration date, like milk only worse because once stock options expire they just disappear, whereas expired milk is kinda useful (try Googling “what to do with expired milk”).
Imagine that as CEO of Reallie Steilish you have a stock option with an exercise price of $1 that’s about to expire tomorrow. Problem is, the share price is $0.99, meaning you’d have to pay $1 to get a share that’s only worth $0.99 – no thanks! You might suddenly start wondering if there’s something you can do really fast to make the share price go up. So, you announce that Reallie Steilish has discovered a new hat technology that gives the wearer the full experience of BEING Billie Eilish. As long as you’re wearing the hat, you become a funky, fashionable, innovative musical genius. Your plan works! Share prices immediately jump to $1000 just in time for you to cash in your option. Congratulations? Now you just have to…y’know, make the hat dream come true.
Quick PSA for Ground-Up Governance followers: there is a whole lot of other executive compensation jargon that we have no current plans to define. If you are interested in silly definitions of things like DSUs, PSUs, STIP, LTIP, peer groups, golden parachutes, etc. then let us know. If 100 people out there actually want that stuff, then maybe we’ll do a series of compensation definitions. Otherwise, we’re leaving it at stock options. You’re welcome!