Andrew Westbrook, a 15-year veteran in the consulting industry,is an assistant vice president of marketing for Titan Consulting,the second largest consulting company in the United States. As partof his compensation package, he has received stock options in thecompany over the years. Because Titan has grown rapidly during histime there, Andrew (along with many others at the organization) hasreaped a great deal of benefit from the stock options he hasreceived, even as an assistant vice president.

Like many companies, the value of Titan stock has decreasedsubstantially over the past few years. The majority of Andrew'soptions entitle him to purchase stock for $22 per share; Titan'sstock currently trades at $15. The ongoing global recovery isexpected to continue to weigh on Titan's results; the company (andits stock) is not expected to grow much in the short-to-medium timehorizon. Titan policy prevents Andrew from selling his stock untilhe leaves the firm.  

1) Under what circumstances will Andrew's stock options generateany gain for him?

If the stock price goes up from $15

If the company adopts a gain sharing plan

If the stock price goes to $19, which is equal to ($22 +$15)/2

If his individual performance exceeds expectations

If the stock price goes above $22

2) Compared to a smaller company, the fact that Titan is a largecompany is likely to have what effect on the motivational power ofAndrew's stock options?

It will increase it

It will decrease it

It will have no effect

It depends on Andrew's retirement benefits

It depends on Andrew's intrinsic motivation

3) When growth is high, extending stock option grants to lowerlevels of the organization as Titan did is likely to__________.

garner favorable tax treatment for the organization

garner favorable tax treatment in the current year for theindividual employee

enable employees at all levels to share the organization'sgrowth, increasing attachment to the organization

make lower-level employees think like owners to a largerextent

be highly motivating to lower-level employees because they willperceive that they have a great effect on the organization'sresults

4) The fact that Andrew cannot sell his shares until he leavesthe organization is likely to _______.

enable him to better plan his retirement

have little effect on his motivation

encourage him not to leave the company during a scandal

make the program more motivating

decrease the motivation potential of the program for him

5) One reason why Titan might be less likely to grant employeeslike Andrew stock options in the future is that ________.

Andrew's stock places him in a higher tax bracket that his firmmust match

academic research suggests that stock options are ineffectivemotivators for executive employees

Andrew's stock options are taxed more heavily now than was thecase in the 1990s

recent scandals about ethics have drawn attention to stockoptions

customers are upset at executive pay, and stock options willcause Titan to lose business