Share options

One of the main ways in which executives at big companies are incentivised. Options give people the right, but not the obligation, to buy shares at a set price. The idea is to reduce the principal-agent problem by aligning the incentives of managers and owners, who want to see the share price rise. Executives have certainly prospered since options became more widely used in the 1980s, thanks to a long bull market in equities. But options have been criticised for encouraging short-termism; managers may be reluctant to make investments that damage the share price. See also options.