Abstract This article focuses on an effective alternative way of inducing corporations to recognize a realistic amount of compensation expense. Firms should be free to assign whatever value they consider appropriate to such stock options subject to one restriction: the firm must be willing to sell up to a specified number of similar options at the same date at a price equal to the stated compensation value to its own shareholders (and perhaps to the public). The plan to grant options would have to be announced ahead of time. The announced compensation value could be stated as a function of the price of the underlying equity on the date the options are granted. There will be several other details. However, the basic idea is that firms can be induced not to understate the compensation value of equity-based options by giving them appropriate economic incentives. The proposal might be criticized on the ground that the purchase of options by non-employees may raise unwanted capital for the firm.
Shyam Sunder (Wed,) studied this question.