[Viewpoint] Regrets on Stock Options

Stock Options:
Balancing Employee Incentives and Investor Protection
Learning from the Kakao Group Controversy

Recently, the exercise of stock options by the management of the Kakao Group has become a controversial issue. Although exercising stock options is not illegal, the problem lies in ignoring the damage suffered by ordinary investors during the process of realizing profits. Stock options are a system that grants the right to purchase a certain number of a company's own shares at a predetermined price within a specified period to secure talented personnel. They are also called stock purchase options or stock acquisition rights. First introduced in the United States in the 1920s, the purpose of securing talented personnel was firmly established in Silicon Valley, the birthplace of venture companies, amid various social and economic factors.

The advantages of stock options are as follows: First, they instill a sense of ownership in employees as members of the company. This allows employees to share in the fruits of the company's growth, contributing to company growth and pursuing productivity improvements. Second, under the Restriction of Special Taxation Act, tax benefits can be received, making stock options highly effective as an employee incentive system and enabling the acquisition of excellent managers. Third, various conditions regarding the granting and exercising of stock options can be created for executives or employees, providing incentives to manage the company in a desirable direction. Fourth, securing executives and employees as stable shareholders can improve ownership structure through ownership dispersion and serve as an effective defense against hostile M&A.

The downside is that executives granted stock options may focus on short-term management performance, which can have adverse effects on the company's long-term growth. One of the causes of the accounting fraud that led to the 2002 U.S. stock market crash at Enron was also stock options. Stock options caused illegal actions aimed solely at raising stock prices rather than increasing corporate value and shareholder wealth. The 2008 global financial crisis, triggered by the Lehman Brothers collapse, was also partly due to executives granted stock options pursuing reckless high-return policies for short-term results, endangering not only shareholders but the global economy.

In Korea, since the revised Securities Exchange Act took effect in April 1997, stock options have rapidly spread, especially among venture companies, significantly contributing to the current second venture boom. Recent studies show a phenomenon where talented individuals flock to startups. This is analyzed to be caused by the many people who became instant millionaires through stock options. Professional managers often earn more income through stock options than their base salary, with the recent Kakao Group case being a representative example. Systems often do not work as originally intended, and in such cases, there are calls to excessively revise the system. Kakao Group has become a momentum in this trend.

The following improvement measures for stock options are proposed. First, for large corporations, it is necessary to review whether stock options are truly desirable. It should be recognized that stock options were activated for the purpose of securing talent in startups. Second, extending the exercise period of stock options could reduce the tendency to pursue short-term performance. Third, in the case of technology companies, stock options should be granted not only to employees working in the field but also to universities and research institutions that have received technology transfers. Especially for startups, growth often depends not only on employees but also on the technology and achievements of external individuals. Hoping that the system improvement will not make the mistake of "burning down the thatched cottage to catch a bedbug," wise improvements that leverage the advantages of stock options while reducing their disadvantages are expected.

This content was produced with the assistance of AI translation services.