The goals of stock option grants are typically to attract and retain
talent, reward past performance, incentivize good future performance,
and keep managers aligned with shareholders' interests. Amounts of
stock option grants are typically based upon an executive's level in
the company, his or her performance relative to established goals, and
their ability to influence the company's financial performance.
Compensation levels of executives in similar positions at other
companies are also often used to ensure that a company's compensation
package is competitive. Levels of other forms of compensation are
also considered, along with those made to peers and the need to
incentivize long-term versus short-term performance. In the end,
though, it is a largely subjective process run by the compensation
committee of the board of directors unless they elect to implement a
formula of their choosing.
Generally, one wants to use longer views of stock performance rather
than shorter views of stock performance when determining compensation.
First, short-term general market conditions can artificially obscure
or enhance the firm's financial performance. Second, one wants to
avoid incentivizing short-term decisions that will temporarily boost
the stock price but hurt the firm over the long run.
I have included links to General Electric's proxy statement that
describes their compensation philosophy, along with two articles
describing what the authors view as desirable stock-option awarding
criteria. I hope you find these references useful.
"Compensation Committee Report" GE, 2005 Proxy Statement (2005)
"2.1 Effective Stock Option Plans" Teachers' Pension Plan (January
"Climbing Toward a Common Goal" By Tom Flanagan, Mike Underwood and
Nick Bubnovich, Financial Executive (2003)