Indexed Stock Options

Indexed Stock Options

Options that have an exercise price which may fluctuate above or below market value at performance options in that the exercise price of indexed options typically remains variable until the option is exercised.
Copyright © 2012, Campbell R. Harvey. All Rights Reserved.

Indexed Stock Option

A stock option that may only be exercised if the company outperforms some stated index such as the S&P 500. This provides extra incentive for the employee (who is usually a senior executive) to see to it that the company performs well. Indexed stock options are favored by some ethical investment groups, as well as by some unions, because they reward performance for the company's work rather than the executive's ability to detect an advantageous moment in the market.
Farlex Financial Dictionary. © 2012 Farlex, Inc. All Rights Reserved
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Other companies using indexed stock options include Level 3 Communications, Chiron, Capital One, RCN Corp., Perceptron, and Nuvelo.
It is harder to explain the apparent dominance of conventional stock options over indexed stock options. The standard explanation focuses on accounting treatments, but this sort of explanation defies normal assumptions about rational investors.