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In the 'old' days, executives got paid in cash, and stock options were just a footnote. Now the reverse is true, stock options grants have come to dominate the pay of top executives. Hall starts the article with a 'short course on options and their valuations' since stock options are often misunderstood. He discusses the main goal in granting stock options: "to tie pay to performance - to ensure that executives profit when their companies prosper and suffer when they flounder." But if pay is truly to be linked to performance, there also have to penalties for poor performance. Although the widely-held perception is that options have unlimited upside but no downside risk Hall claims that this is not true: "In fact, options have even greater downside risk than stock. ... Far from eliminating penalties, options actually amplify them." He uses several examples to prove and explain his point. So how can you effectively use options? Hall claims that compensation needs to be tied to a performance measure that looks forward rather than backward. And he believes that stock options are the ultimate forward-looking incentive plan: "they measure future cash flows, and, through the use of vesting, they measure them in the future as well as in the present." Hall divides options plans up into three types. (1) Fixed value plans: Executives receive options of a predetermined value every year over the life of the plan. (2) Fixed number plans: Executives received a predetermined number of options over the plan period. (3) Megagrant plans: Both the number of options and the exercise price are fixed, making them the most highly leveraged type of grant. The advantages and disadvantages of each type are discussed in detail, plus there is a pay-example comparing the three plans. Time and time again, Hall expresses his concern about the lack of knowledge about stock options. Therefore, thousands of companies choose the wrong stock option plan. "Only by building a clear understanding of how options work ... will a company be able to ensure that its option program is actually accomplishing its goals."
Yes, I like this article into the strange world of stock options. The author debunks widely-held myths about stock options, whereby he uses simple examples, figures and tables to explain the different available stock option plans. This article is a great introductory article for people unfamiliar with stock options. It is written in very simple business US-English, so all of us can now understand how effective stock options can be as an incentive tool.
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Like some of the others I bought other investment club books but you really don't need them. This one will do just as well and it's entertaining to boot.
As with any other Motley Fool book this one has a reasonable balance of good, clear concise information, and foolish humor.
As a primer for beginners, this book is the best I've seen. It has lots of samples of forms and the agreements and by-laws. It is written at a level that any investor should understand what is going on.
I highly recommend this book to anyone interested in starting an investment club.
While the other two books are very thorough and very well done, this one is the easist to read and understand.
I recommend all new Investment Club members to try this book.