An exercise mechanism in which an executive pays the strike price of a given dollar amount per option (X) in cash and receives one share of stock from his company bearing a specific price at the time of exercise (S_T). While this is quite similar to the traditional way of exercising exchange-traded options, there is some big difference. The option-issuing company, in many cases, lends the cash amount (X) to the executive (in the way of an executive loan).

These executive loans used to be granted at below-market interest rates, making cash exercises of employee stock options “way too attractive”. Legislation (such as the Sarbanes-Oxley of 2002 in the U.S) prohibiting such practices were put in place, though some companies are outfoxing these legal constraints by allowing managers an access to external loans at favorable rates.