The board of directors of Wireless, Inc is considering two compensatio

The board of directors of Wireless, Inc is considering two compensation plans for the CEO of the company. The
first would pay the CEO a salary of $250,000 for the upcoming year.

The second would pay the CEO a salary of
$100,000 and provide the CEO with a stock option to buy 100,000 shares of stock for $11 per share. The current
price per share of Wireless, Inc stock is $10 per share. The stock option expires at the end of the year. Why
might shareholders prefer the second payment plan? As part of your answer, calculate the break-even point for
the CEO to obtain the same compensation under option two as he or she would under option one.

ANSWER

Shareholders may prefer the compensation package that includes stock options because the options give the CEO the
incentive to maximize the price of the company’s stock, thus benefiting the shareholders. A fixed salary, regardless of
stock price performance, can lead to a CEO who is willing to do the minimum necessary to maintain the job, but who is
not motivated to work extra hard for the shareholders. For every dollar the price of the stock exceeds $11 per share, the
CEO will make an additional $100,000. Thus, if the share price increases to $12.50, the profit on the stock option
[($12.50 – $11.