This paper analyzes the cost and value of non-tradable stock options held by undiversified, risk-averse executives and the pay/performance incentives they provide. It introduces the concept of "Executive Value" lines, which are risk-adjusted analogues to Black-Scholes lines, and distinguishes between "executive value" and "company cost." The paper shows that the divergence between the value and cost of options explains many issues in stock option practice, including executive views on Black-Scholes measures, trade-offs between options, stock, and cash, exercise price policies, connections between pay-setting and exercise price policies, institutional investor views on options and restricted stock, option repricings, early exercise policies, vesting periods, and CEO pay levels. The paper also explores the implications of non-tradability for executive stock options, showing that traditional option pricing formulas like Black-Scholes overstate the value of non-tradable options to risk-averse executives. It introduces a "certainty equivalence" approach to estimate the value of non-tradable options to undiversified executives and shows that the value of options is significantly lower than their cost to the company. The paper also discusses the implications of this value-cost divergence for academic research on total compensation, showing that aggregate calculations are measures of company cost, not executive value. The paper then analyzes the pay/performance incentives created by non-tradable executive options, showing that incentives depend on the exercise price and the stock price. It shows that incentives are maximized at exercise prices at or near the grant-date market price when the grant is an add-on, but at close to zero when the executive is "charged" for the options through reduced cash compensation. The paper also discusses the implications of early exercise, showing that allowing early exercise increases option efficiency by narrowing the value-cost divergence. Finally, the paper discusses the implications of the analysis for the design of employee bonus plans, showing that the findings have broad implications for executive compensation practices. The paper concludes that the value-cost divergence of stock options has important implications for understanding executive stock option plans and, more generally, executive compensation practices.This paper analyzes the cost and value of non-tradable stock options held by undiversified, risk-averse executives and the pay/performance incentives they provide. It introduces the concept of "Executive Value" lines, which are risk-adjusted analogues to Black-Scholes lines, and distinguishes between "executive value" and "company cost." The paper shows that the divergence between the value and cost of options explains many issues in stock option practice, including executive views on Black-Scholes measures, trade-offs between options, stock, and cash, exercise price policies, connections between pay-setting and exercise price policies, institutional investor views on options and restricted stock, option repricings, early exercise policies, vesting periods, and CEO pay levels. The paper also explores the implications of non-tradability for executive stock options, showing that traditional option pricing formulas like Black-Scholes overstate the value of non-tradable options to risk-averse executives. It introduces a "certainty equivalence" approach to estimate the value of non-tradable options to undiversified executives and shows that the value of options is significantly lower than their cost to the company. The paper also discusses the implications of this value-cost divergence for academic research on total compensation, showing that aggregate calculations are measures of company cost, not executive value. The paper then analyzes the pay/performance incentives created by non-tradable executive options, showing that incentives depend on the exercise price and the stock price. It shows that incentives are maximized at exercise prices at or near the grant-date market price when the grant is an add-on, but at close to zero when the executive is "charged" for the options through reduced cash compensation. The paper also discusses the implications of early exercise, showing that allowing early exercise increases option efficiency by narrowing the value-cost divergence. Finally, the paper discusses the implications of the analysis for the design of employee bonus plans, showing that the findings have broad implications for executive compensation practices. The paper concludes that the value-cost divergence of stock options has important implications for understanding executive stock option plans and, more generally, executive compensation practices.