What Are Stock Options?
Stock options give the holder the right to buy company shares at a predetermined price (the “strike price” or “exercise price”) within a set period. The strike price is typically the market price on the grant date.
If the stock rises above the strike price, the options are “in the money” and the CEO profits from the difference. If the stock falls, the options are worthless. This creates a direct incentive to increase the stock price.
Example
A CEO receives 100,000 options with a strike price of $50.
If the stock rises to $80: profit = (80 - 50) × 100,000 = $3,000,000
If the stock falls to $40: profit = $0 (options expire worthless)
What Are RSUs (Restricted Stock Units)?
RSUs are a promise to deliver actual company shares at a future date, subject to a vesting schedule. Unlike options, RSUs always have value — even if the stock price declines — because they represent full shares, not just the right to buy at a price.
Most RSU grants vest over 3-4 years, with shares delivered in equal installments (e.g., 25% per year). The CEO receives the shares and can sell them once vested.
Example
A CEO receives 50,000 RSUs when the stock is $50.
If the stock rises to $80: value = 50,000 × $80 = $4,000,000
If the stock falls to $40: value = 50,000 × $40 = $2,000,000 (still valuable)
What Are PSUs (Performance Share Units)?
PSUs are like RSUs with an extra condition: they only vest if the company hits specific performance targets (revenue growth, earnings per share, relative TSR). If targets are missed, some or all PSUs are forfeited. If targets are exceeded, the payout can be multiplied (typically up to 200% of target).
PSUs are increasingly popular because they tie CEO wealth directly to measurable results, not just stock price movement. SEC proxy statements disclose the target metrics and achievement levels.
Why Companies Shifted From Options to RSUs
Before 2005, stock options dominated executive pay because companies were not required to expense them on the income statement. The adoption of FASB ASC 718 (formerly FAS 123R) changed that — options now must be expensed at fair value. This eliminated the accounting advantage and exposed companies to more compensation expense volatility.
RSUs are simpler to value, provide more predictable expense, and always have value for the executive (reducing the risk of underwater options that fail to retain talent). Today, most S&P 500 companies use a mix of RSUs and PSUs rather than stock options.
How Equity Awards Appear in SEC Filings
In the Summary Compensation Table (SCT), stock awards and option awards are reported at their grant date fair value under FASB ASC 718. This means the number reported is an estimate at the time of grant — the actual value the CEO receives when shares vest or options are exercised may be significantly higher or lower.
For a more accurate picture of realized pay, look at the “Option Exercises and Stock Vested” table in the proxy statement, which shows actual gains from exercised options and vested RSUs during the year.
Key Differences at a Glance
| Feature | Stock Options | RSUs | PSUs |
|---|---|---|---|
| Value if stock drops | $0 | Reduced but positive | Reduced or $0 |
| Vesting condition | Time only | Time only | Time + performance |
| Upside leverage | High (leveraged gains) | Moderate (1:1 with stock) | High (multiplier possible) |
| Retention power | Low if underwater | High | High |
| Prevalence today | Declining | Dominant | Growing |
Explore CEO equity breakdowns on our highest-paid CEO rankings, where you can see how stock awards, options, and cash divide across the top earners.