Opinions on Options: Discordant Incentives and Desultory Disclosure

Abstract

In this paper we examine the controversy which has surrounded options awarded to executives as a component of their remuneration. We aregue that many of the claims advanced in favour of the use of options schemes by employer corporations are flawed. In particular, we suggest that the alleged incentive alignment effects of granting options to executives either do not manifest themselves as strongly in practice as might be expected in theory, or are undermined by other factors, which we set out in this article. Further, we are critical of the view that the current status quo in financial reporting treatment of options granted in lieu of cash or other forms of remuneration is appropriate or able to be justified as a matter of principle. We discuss our preferred alternative treatments and advance a case as to why we believe that they would represent a more appropriate means of accounting for options than prevailing practice.

Keywords: Executive options, incentives, financial reporting