Discuss why a firm might be reluctant to use oso options

Reference no: EM13222731

Level 3 Communications is a diversified communications and information services company, with over $1.5 billion in revenues in 2002. In order to recruit and reward talented senior employees, it implemented its Outperform Stock Option (OSO) program in April 1998. Level 3 rewards its senior executives with OSO options, whose value is based on Level 3's stock market performance relative to the performance of the S&P index. The option only has value if Level 3's stock outperforms the S&P 500, but it has no immediate value if its stock does worse than the S&P 500.

a) Use the principles of incentive contract design to analyze the main advantages of the OSO program.

b) Only a few firms have adopted similar programs. Discuss why a firm might be reluctant to use OSO options.

Reference no: EM13222731

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