Stock options : why do they scare people?

Louis Gallois has announced officially his desire to eliminate Stock options within his company EADS due to the insider trading scandal. Some top executives and corporate shareholders, Lagardere and DaymlerChrystler, indeed sold substantial amounts of shares just before announcing the company problems, by using illegally their insider knowledge.

Stock options have been created originally in order to motivate managers to work efficiently. Their earnings were indexed to the company's shares value. Theoretically this tool was supposed to help all the stakeholders. Shareholders would eliminate the agency problem, which claims managers may not work for the benefit of shareholders. And Managers would have the possibility to increase their earnings.

However the real and effective impact of stock options is different. Managers use their insider knowledge for their own goals. They focus on short-run to maximise shares value and thus their earnings. Then just before bad news announcement, they sell illegally the shares. It is illegal because it privileges an investor over another and establish asymmetric information. Thus stock market confidence goes down. This problem is not new. Previous financial scandals such as Enron emphasized it.

Finally EADS scandal may release the end of stock options existence. The desire to destroy stock options is not the goal of only Mr Gallois. New French government intend also to establish new rules to prohibit them and act to curb so-called “golden handshakes”