George is the CEO of Jones International Inc. As part of his compensation, Georg
ID: 2808529 • Letter: G
Question
George is the CEO of Jones International Inc. As part of his compensation, George is awarded a number of stock options exercisable at a price of $25. Due to the economic conditions prevailing since 2008, Jones International’s stock price did not increase much, and currently is trading in the range of $18 to $20. The company’s sales have been lower than prior years, but they managed to cover all their operating expenses and did not lay off any employees. The company’s board decided to lower the exercise price to $15 on the stock options granted to George due to his good management efforts to keep the company afloat during the bad economy. Are the board’s actions unethical?
I dont get this question, I am suppose to choose which one is true out of all the choices below.
The board’s actions are ethical because George was able to keep the company profitable and did not lay off any employees
The board’s actions are unethical because lowering the exercise price reduces the manager’s incentives to increase his performance.
The board’s actions are unethical because the board should have lowered the exercise price for all their executives and not just the CEO.
The board’s actions are unethical because they should have awarded additional stock options to the CEO for his loyalty.
The board’s actions are unethical because they didn’t consult with the CEO before taking their action.
The board’s actions are ethical because George was able to keep the company profitable and did not lay off any employees
The board’s actions are unethical because lowering the exercise price reduces the manager’s incentives to increase his performance.
The board’s actions are unethical because the board should have lowered the exercise price for all their executives and not just the CEO.
The board’s actions are unethical because they should have awarded additional stock options to the CEO for his loyalty.
The board’s actions are unethical because they didn’t consult with the CEO before taking their action.
Explanation / Answer
This question is pertaning to the decision making of Board is reducing the exercisable price for George is ethical or unethical. Basically it is one way of rewarding the good performance of the CEO in tough economic conditions by reducing the exercisable price. Redcution in exercisable price helps George reducing its cost to exercise the stock options for same number of shares. It makes sense for the Company also that without making any cash expenditure they are rewarding the performance of the CEO. This is based on the assumption that the number of shares committed to George are same before and after redcution in exercisable price for stock options.
Therfore Board decision to reduce the exercisable price for stock option is ethical.
Therfore the correct option among all the choices is
The board’s actions are ethical because George was able to keep the company profitable and did not lay off any employees.
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