Stock options are a form of equity-based compensation that gives senior management the right to purchase company stock at a predetermined price at a future date. The value of these options is directly linked to the company's stock price appreciation over the long term. This structure effectively aligns the financial interests of senior management with those of shareholders, incentivizing decisions that promote sustainable growth, profitability, and the overall long-term health of the organization, rather than focusing solely on short-term metrics.

A. Commissions are typically tied to short-term sales or revenue targets and do not reflect the overall long-term health or profitability of the organization.

C. Gain-sharing bonuses reward employees for short-term improvements in performance, such as cost savings or productivity gains, not necessarily long-term strategic success.

D. Allowances are fixed components of a compensation package (e.g., for housing or travel) and are not tied to performance or organizational health.

1. Core

J. E.

& Guay

W. R. (2010). Is CEO Pay Too High and Are the Incentives Right? In Handbook of the Economics of Finance (Vol. 2

pp. 1041-1100). Elsevier. In Section 3.2

"Equity-Based Incentives

" the authors discuss how stock options and other equity grants are designed to provide long-term incentives by linking executive wealth to the firm's stock price performance

thereby aligning manager and shareholder interests.

2. Devers

C. E.

Cannella Jr

A. A.

Reilly

G. P.

& Yoder

M. E. (2007). Executive compensation: A multidisciplinary review of recent developments. Journal of Management

33(6)

1016-1072. The article extensively reviews executive compensation literature

noting that "long-term incentive plans (e.g.

stock options

restricted stock) are designed to focus executives on the long-term performance of the firm" (p. 1021).

3. The Institute of Internal Auditors (IIA). (2017). Sawyer's Internal Auditing: Enhancing and Protecting Organizational Value (7th ed.). Chapter 11

"Governance

" discusses the board of directors' responsibility for overseeing executive compensation. It emphasizes the need for compensation structures that align executive interests with the long-term interests of shareholders

with stock-based compensation being a primary tool for achieving this alignment.