Stock Options in Employee Compensation: Employing a Symmetrical Reload Feature

The granting of options on common stock to corporate executives has recently attracted a great deal of attention. Some scholars suggest that the granting of options will help motivate key employees to act in the best interests of the share-holders of a corporation. There are also strong criticisms of the conflicts of interests that the most commonly granted options may have the propensity to create. The reloading of options to lower settlement prices in response to declining market values has been criticized as a management perquisite that has little potential for adding value to a firm. This article proposes a strategy for systematically repricing options in both directions according to expected returns on corporate common stock, with a new, market-based method for determining the reload price. This technique promises to retain the motivational benefits of stock option grants while curbing some of the abuses for which these instruments have been criticized.