Stock Options as Incentive? Not in the Way You Think

Susan Hall

Despite all the hue and cry about executive compensation in the midst of the recession, CEO pay is back to pre-recession levels or higher.

 

CEO compensation grew by 12 percent in 2010, according to a study conducted for The New York Times by compensation consultants Equilar, while professional services company Towers Watson put it at 17 percent for 2010, compared with a 3 percent median increase in 2009. Regardless of which number is correct, it's more than you or I got.

 

But our Rob Enderle has pointed out, short-term focus on share price prevents long-term attention to execution within the company.

 

A study highlighted at Knowledge@Wharton, however, provides fodder for keeping the share price up, however damaging that might be in other ways.

 

Management professor Peter Cappelli and Martin J. Conyon, a senior fellow at Wharton's Center for Human Resources, set out to look at how stock options, which aren't just the province of top management at many companies, affect performance. In fact, the article says 9 million workers in the United States participate in plans offering stock options. It turns out, though, that options aren't that big a driver of performance until an employee sells some and gets a good payday. That's where the top share price comes in. Actually, options might not act as an incentive at all, but rather as a gift that the employee then feels compelled to repay with improved performance.


 

Said Cappelli:

The story is not that people work harder to make the share price go up. It is that if the share price goes up and people make money, they feel an obligation to work harder. That's a bit of a surprise.

This sense of obligation tends to last about a year. The article notes previous research has found some positive effects of stock options, though, particularly on retention in a tight labor market.



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