Why are pay-for-performance stock option grants considered an incentive to improve company results?

• A. They reduce the company's tax liability by increasing expenses.
• B. They guarantee employees a fixed bonus regardless of company performance.
• C. They align the interests of employees and shareholders by rewarding employees when the company's stock price increases.
• D. They provide employees with immediate cash payments upon grant.

Answer: (C)

Verified step by step guidance

1. Understand the concept of pay-for-performance stock option grants: These are incentives given to employees, typically executives, that allow them to purchase company stock at a predetermined price. The value of these options increases as the company's stock price rises, encouraging employees to work towards improving company performance.
2. Analyze the alignment of interests: Pay-for-performance stock options align the interests of employees and shareholders. When employees are rewarded based on the company's stock price performance, they are motivated to make decisions that enhance shareholder value.
3. Evaluate the impact on company results: Employees are incentivized to focus on strategies that improve profitability, operational efficiency, and overall company performance, as these factors contribute to an increase in stock price.
4. Compare with other options: Unlike fixed bonuses or immediate cash payments, stock options are tied directly to the company's performance, ensuring that employees benefit only when the company performs well.
5. Conclude why this is an effective incentive: By linking employee rewards to stock price performance, pay-for-performance stock options create a direct connection between employee efforts and company success, fostering a culture of accountability and shared goals.