Buffalo Business Daily

What's the difference between stock and stock options?

Much of CEO pay has taken the form of stock options rather than grants of stock.Which form of compensation gives the CEO greater incentive to increase shareholder value: one million dollars in stock or one million dollars worth of stock options?

Public Comments

1. There is a big difference. Unless the company goes bankrupt, the stock will always be worth something. Options can easily lose all their value if the stock goes down even a small persentage. Options are a leverage tool. Options are usually issued with a strike price based on the stock's value when the options were issued. So if the stock goes up, the gain on the options will likely be much larger than the stock. If the stock goes down, then the options will be worthless (assuming that their strike price was based on the stock's original value, as I had stated). To truly tie CEO compenstaion to performance, the best idea (for the shareholders) is to issue the CEO options with a long vesting period that goes beyond the time the CEO leaves the company. This way, if the CEO's decison increase LONG-TERM stock value, he will profit. If not, no bonus. As is clearly evident in the financail sector, short-term profits often come at the expense of long-term viabilty.
2. Stocks are simply part ownership in a company. Stock option is a contract right to buy or sell a stock at a given price in the future.
3. Options. No comparison. Stock is equity from the start. For options as incentives to have value, the CEO needs to deliver growth in the value of the company to show value above the strike price for the options.
4. 1. stock is the underlying asset of stock options. 2. depends on the strike price of the stock options.
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6. Stock options give you the right but not the obligation to buy (or sell) stockat a given price. They are more volatile ( changing in value much quicker than even the stock market.) Owning a stock is more expensive, and it means you own part of the company, and you recieve dividends, which option owners do not. The option is a derivative because its value varies based on the value of the stock.