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Which of the following are typical criticisms of executive share option schemes (ESOPs)?
1 When directors exercise their options, they tend to sell the shares almost
immediately to cash in on their profits
2 If the share price falls when options have been awarded, and the options have no
value, they cannot act as an incentive
3 Directors may distort reported profits to protect the share price and the value of
their share options
A 1 only
B 1 and 3 only
C 2 and 3 only
D 1, 2, and 3Please explain it, Sir.
Does the book in which you found the question not explain the answer?
In future you must say what problems you have with the answer and not simply set a question.
The option is the right to buy share the company at a fixed price on a future date. The intention of giving them to directors is that they are then encouraged to make the business more profitable to that the share price increases (which is good for all of the shareholders).
However, although the intention is good, 1 and 3 of the items listed are typical criticisms (for what should be fairly obvious reasons). Item 2 is not really valid because even if the share price falls, they are still incentivised to get the price higher again.
Sorry sir. They did not explain. Thank your for your help.
they show D as the correct answer, please explain why?I have already explained 1 and 3.
I suppose 2 is a typical criticism, but for the reasons I wrote before I do not think it a valid criticism.
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