Final Project

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Abstract
Stock options are famous utilities applied by companies to draw, retain and inspire their employees. They too are effective mechanisms to align the interests of the management more intimately with those of shareholders, with favorable connotations of long-term business performance. However, the appropriate accounting treatment of these options has been a matter of much discussion and little agreement. This paper provides main issues, recent studies and future applications of stock options to the business world.
Introduction
The triumph of businesses relies on its human resource capabilities, within the motivations of the system understood as one of the critical mechanisms affecting its performance.
Agency theory proposes that reward policies should be in a way to provide management with rewards to choose and implement decisions that improve shareholders wealth (Jensen and Murphy, 1990). An executive’s overall compensation package includes benefits, wages and incentives. Incentives are essential packages because they motivate managers.
In the latest years, alternative premium methods to premium cash payments have been monitored. It is in these lines that the matter of stock options arises. As a matter of fact, stock options have been in use both for managers and employees. Employee stock options provides rewards for both executives and employees for them to make decisions that only and only improve the share prices of the company. This is meant to improve the shareholders and management interests hence reducing the agency costs. They are considered efficient because they give a direct link between the shareholder wealth and the expected utility. However, accounting for stock options is a controversial case that has received attention by some supervisory bodies.
Issues affecting the stock options
Stock options give the owner a warrant to obtain a precise number of the company’s shares at a set time in the future at the exercise price. It therefore follows that, employee stock options give an employee a warrant to purchase his company’s shares at a future date known as the exercise date. From the above definition, it is clear that employee stock options are call options and only call options. Traded stock options differ from ESOs in three ways (Hemmer et al., 1994). First, an employee is not obligated to pay a premium in order to earn the option. In addition, ESOs always have a longer time to maturity as compared to the traded stock options. As a matte of fact, Employee stock options can never be sold to a third party. If you were to consider Mehran and Tracy, it can be argued that stock options have a vesting period. This obligates the employee to work for the company in question until the maturity date is due. If one opts to quit before the vesting period, he will forfeit the options. Thus, ESOs are use to maintain staff in corporation...