Question

As we have seen, much of the volatility in a company’s stock price is due to systematic or marketwide risks. Such risks are beyond the control of a company and its employees. What are the implications for employee stock options? In light of your answer, can you recommend an improvement over traditional employee stock options?

Answer 1

In the financial market, risk is an important factor which causes a change in the expected return of the securities. The risks can be various but cab be categorized into two systematic and unsystematic risk.

While the systematic risk is systematic in nature which causes a problem for all the companies working in a industry. It;s effects cannot be neutralized. The companies can adopt those changes in order to cope with it.

Unsystematic risk is particular to a specific company only. it does not affect all the companies working in a particular industry. it can be neutralized by adopting certain strategies.

Employee stock option is the option given to employees of the company to buy the shares of the company for a set price within a certain time frame. It is a kind of compensation given to them in order to stick with the company. The both risks that are systematic and unsystematic has an effect on it.

The effect of systematic risk cannot be neutralized by the efforts of employees. The employees who subscribed for those options work very hard to gain in the share prices but in case of systematic risk even they are working exceptionally well,its effects cannot be neutralized.

There are certain steps which needs to be taken in employee stock options plan. If the securities prices are going down due to systematic risk, then the price to subscribe the option should decrease. It should be sync with the that risk so that employees still have an interest to buy company's shares. This will help employees being with the organisation.