payoutstendtobeloweratfirmswithemployeeoptionsthan
at otherwise similar firms without these options.
32 Kahle(2004)presents evidencethatstockbuybacks are
more common when firms have large numbers of options
outstanding, and suggests that the repurchases may be
motivated byboth theneed to covertheexercise of these
options and the desire to keep the stock price high.
33 Atthesametime,financialmarketsreactlesspositivelyto
thesebuybacks, suggestingthat theyrecognizethemotives
for the buybacks.
The Bottom
Line Options and common stock may both be equity
instruments but they have different characteristics. In
particular, risk that can affect common stock values
negatively can increase option values. This fundamental
contrast can explain why firms should be cautious about
jumping on the option compensation bandwagon. If the
reasons for using options are reducing the gulf between
managerial and stockholder interests and a cash shortage,
usingcommonstock(restrictedorotherwise)willaccomplish
these objectives without the side costs of options.
RESTRICTED STOCK
Whileoptionshaveclaimedthelion’sshareoftheattention,
whenitcomestoequitycompensation,givingequityinfirms
isapracticethatpredatesoptionsbydecades.Firms,private
andpublic,haveattractedemployeesbyofferingthemequity
stakesinadditiontoconventionalcompensation.Whenshares
areofferedtoemployees,itisnotsurprisingthatthereoften
arerestrictionsimposedonlayingclaimtothesesharesand