What provides rewards to managers for upside company stock performance but no out-of-pocket penalty for downside company stock performance,yet gives the manager an orientation to how well the company's stock is doing?

Question

Quizplus · Accepted Answer

Stock options provide rewards to managers for upside company stock performance, but there is no out-of-pocket penalty for downside company stock performance. The manager has the option to buy the stock at a set price (exercise price) which is usually lower than the current market price, so they can benefit from any increase in the stock price. However, if the stock price decreases, the manager can simply choose not to exercise the option and incur no penalty. Stock options also give the manager an orientation to how well the company's stock is doing, as they will only exercise the option if they believe the stock price will increase.

What Provides Rewards to Managers for Upside Company Stock Performance