Why do companies allow executives to choose to pay cash or shares upon exercise of ESOs or vesting of RSUs

Many equity compensation plans and grant agreements allow companies to give the choice to the executives to pay cash or deliver shares to pay the exercise prices to the company . The companies also allow the delivery of shares for tax withholdings, with the companies then paying the taxes in cash to the IRS and the state.

And many companies give discretion to the company to choose between cash or shares as payment of the exercise price or tax withholding.

Most of those plans and grant agreements are approved by the Board of Directors or the Compensation Committee.

The question arises: Why are the executives given discretion and why are the companies given discretion. Cui Bono?

Does the company benefit or does the grantee benefit?

Does the executive have a benefit if he/she can decide the timing and the method of payments, which the issuer must accept?

Can the executive, for example the CEO and President, influence the company's discretionary decision?

Is the company facilitating trading on inside information, by giving the discretion to the executive, which the company must accept?

The answers to the questions above are:

a) the grantee benefits and

b) the answers is yes to the other three.

How much extra is the cost of giving discretion to the executives?

Answer: It is not a small benefit.

It may be the case that the designers of the discretionary plans and the executives who are approving such discretionary plans are violating their fiduciary duties  to their shareholders by allowing the executives to trade on inside information.

John Olagues