When Would Stock Options Offered to an Employee Be Ineffective

question 12

Multiple Choice

When would stock options offered to an employee be ineffective in reducing the principal-agent problem?

• A) When the link between worker effort and the share price of the firm is clear.
• B) When stock options form a large proportion of the worker's pay.
• C) When the share price of the firm is affected by external factors.
• D) When the worker is unable to influence the share price of the firm.

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Definitions:

Opportunity Cost

Opportunity cost is the value of the next best alternative forgone as the result of making a decision.

Henry George

A 19th-century economist known for his belief that people should own the value they produce themselves, but that land and natural resources should belong to all (Georgism).

Allocative Efficiency

A state of resource allocation in which it is impossible to make any one individual better off without making at least one individual worse off.

Incentive Function

The role of rewards or penalties in motivating individuals or entities to behave in certain ways.