As a result, companies often end up having option programs that are counterproductive.
I have, for example, seen many Silicon Valley companies continue to use their pre-IPO programs—with unfortunate consequences—after the companies have grown and gone public.
Certainly, option grants have improved the fortunes of many individual executives, entrepreneurs, software engineers, and investors.
Most option holders, however, do not receive dividends; they are rewarded only through price appreciation.
Since a company that pays high dividends has less cash for buying back shares or profitably reinvesting in its business, it will have less share-price appreciation, all other things being equal.
Twenty years ago, the biggest component of executive compensation was cash, in the form of salaries and bonuses. Last year, Jack Welch’s unexercised GE options were valued at more than 100 million. executives hold unexercised options worth tens of billions of dollars.
With astounding speed, stock option grants have come to dominate the pay—and often the wealth—of top executives throughout the United States.
Black-Scholes provides a good estimate of the price an executive could receive for an option if he could sell it.