According to Biswas,“It is common compensation practice to include share-based compensation packages to the total compensation package” (Biswas, 2013). Share based compensation plans give employees ownership in the company and the goal of share-based compensation plans is to align the interest of the shareholders, management, and employees. When employees have a stake in the company they are more likely to be concerned with the company’s profitability and will try harder to drive up profits.
Stock option plans are different from stock award programs because stock option plans present employees with the option to purchase stock whereas stock award programs are grants of stock that are subject to certain conditions. Stock option plans have grown in popularity and are now an essential piece of any total compensation plan for senior management, executives, and key employees.
Stock option plans give employees the option to purchase a specified number of shares of the firm's stock, at a specified price, during a specified period of time. They have been somewhat controversial in the past because they help the CEOs and executives of various companies become extremely wealthy. The method of expensing stock option plans has caused a lot of debate over the correct method to measure the value of these plans. Stock option plans used to be reported at the intrinsic value, the difference between the market price and exercise price, which was typically zero dollars and was reported on the footnotes of the financial statements. The actual value of these stock option plans could be in the millions of dollars, but would be recorded as not having any value and were an integral part of CEO’s compensation, therefore, CEO’s were becoming extremely wealthy when they exercised and sold their stock option plans.
The Federal Accounting Standards Board issued a standard in 1993 that required fair valuation, but they then made it a...