In the early 2000s, stock options were clearly the incentive of choice. Accounting rule changes and investor pressures have pushed stock options out of favor; restricted stock awards now seem to take their place in pay plans. Why, then, do private equity firms—who are often among the largest and certainly the most involved investors—still use stock options among their portfolio companies?

Jamie McGough, a partner with Meridian Compensation Partners, makes his case on why the use of stock options has diminished and why he thinks companies might want to reconsider stock option plans in their executive pay packages.