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2022 Aug/02
Current State and Proposed Improvement for Stock Options of Listed Firms
Issue Papers 22-14
PDF
- Research Topic Corporate Finance
- Page 24
- Summary
- As stock-based compensation plans for executives of listed companies have come to the fore, this has sparked social controversy over stock options, one of the stock compensation schemes widely used by Korea’s companies. A stock option plan is a compensation mechanism designed to alleviate agency problems between shareholders and corporate managers and improve long-term management performance and shareholder value. In this respect, this article conducts a comprehensive analysis of the current state and characteristics of stock options utilized by Korea’s listed companies, explores whether the stock option scheme serves its intended purpose, and presents improvement plans.
An analysis of stock options granted by listed companies between 2015 and 2021 has produced the following findings. First, listed companies are increasingly granting stock options, most of which have a cliff vesting provision except for a small portion of performance-linked or partially-exercised stock options. Notably, a majority of stock options can be freely sold after exercise as long as they satisfy the minimum exercise period requirements specified in the Commercial Act, which is unlikely to motivate management to hold treasury shares. Second, stock options are primarily used by listed companies that are cash-strapped and have high growth potential. But granting stock options to corporate managers does not necessarily lead to shareholders’ value improvement. Third, it has been confirmed that stock option holders are likely to exercise stock options during the initial period of exercise and dispose of such stocks in a short period after exercise. In particular, stock returns reported before and after the exercise of stock options or disposal of stocks have been favorable to stock option holders, implying that they may strategically choose the time of exercise or disposal. The overall results suggest that how stock options are practically used by companies is inconsistent with the original objective.
In this respect, it is essential to create an environment where the stock-based compensation scheme including stock options function well to achieve its intended purpose. To this end, a policy is needed to encourage listed companies to voluntarily design stock option plans based on specific principles and require key executives to mandatorily hold a certain amount of equity even after stock options are exercised. Also necessary is to forestall misuse of stock options by providing wider access to stock option-related information and adopting a prior disclosure for disposal of stocks by executives.