Explain the agency problem. How can stock option programs work to lessen the agency problem?

The agency problem is considered to be a conflict of different interests between management, shareholders, and company’s creditors due to different approaches to the goals and results of the company’s operations or because of different ideas and opinions on how the company has to be run in the market.

Thus, this paper introduces the information on the agency problem, discusses and explores how stock option programs can work to lessen the agency problem.
Explaining the agency problem, it is possible to say that the agency problem arise when the ideas of the board of directors, shareholders, etc. on how business should be run and operated domestically and internationally are different and not absolutely aligned. There are a lot of individuals who are interested in the company’s performance. Among them are the managers who operate the company daily, the shareholders who own one or more stocks in the capital of the company, and the board of directors who control and manage the company’s development and its prosperity. Therefore, the agency problem occurs when their interests are not perfectly aligned.

Talking about the stock option program, it should be mentioned that this is a special program within a company, which allows the executives to purchase the stock options of the company for a certain period of time. In addition, it promotes the shareholders’ interest (for example, increasing the cost per one share). The stock option programs are aimed at aligning the interests of the shareholders and management. The best stock option programs are those that apply call options. These call options encourage the executives to increase the cost per one share to a specific point.
Taking the above-stated information into consideration, it is possible to mention that the agency problems can be lessened with the help of stock option programs. The executives’ right to buy the company’s shares for a stated amount of time will encourage and motivate them to improve and increase the performance of the company.


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