Chapter 1: Introduction

Employee Stock options (ESOs) are call options granted by a firm to its employees as a form of compensation and incentive. The primary objective is to align the interests between the employees and the firm. As such, they are often used for recruiting and retaining employees. Since the mid-1980s, stock options have become an integral component of compensation in the United States. According to Table 1.1, the percentage of S&P 500 companies granting ESOs was as high as over 94% in 2001 and remained above 72% in the following decade…