Benefits of Granting Options

Introduction to Benefits of Granting Options

Directors' share option schemes have been a popular method of rewarding the directors of large listed companies and several arguments have been put forward to support their use. It is frequently suggested, for instance, that a well-designed scheme will benefit shareholders as it will help to align the interests of directors with those of shareholders.

Some argue that share options may even help to strengthen the psychological bond that a director has with the company. By exercising an option and obtaining shares, the directors may identify more closely with the company and feel a sense of shared purpose with other shareholders. Though, this argument does rely on the directors retaining, rather than selling, the shares obtained within the option agreement.

It has also been suggested that share options may help to retain board members. The fact that a director's share options are normally forfeited if a director leaves the company can provide a strong incentive to stay. Thus, options can provide a set of 'golden handcuffs for talented directors who have other employment opportunities. Unlike other forms of directors' remuneration, share options involve no financial outlay for the company at the time that they are granted. If the share price does not perform well over the option period, the option will be allowed to lapse and the company will incur no cost. Alternatively, if the shares perform well and the options are exercised, they present a form of deferred payment to the directors. This deferral of rewards may be particularly attractive to a growing company that is short of cash.

Where directors exercise their options and the company, therefore, issues shares at below their current market value, there is a very real cost to the company? Were the company to issue those same shares to an ordinary investor, it would receive the current market price for them.

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