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Lie Explains Stock Options

In this article, some common questions about stock options are answered in light of federal investigations into potential abuses involving backdating of options awards. Stock options are intended to tie the pay of CEOs and other employees to a company's performance: The options don't rise in value unless the company's share price also rises. Stock-options plans, which outline how many shares are to be granted as options and how they are awarded, are first put to a shareholder vote. Once approved, it is left to the compensation committee of the board to approve individual option grants. ERIK LIE, a University of Iowa associate professor of finance who has researched option grants, says that the board is supposed to make these decisions and make them independently of management. But he contends that in some cases, management may exert improper influence on these decisions.

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