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How Stock Options Reward Managers for Destroying Value and What To Do About It

Michael C. Jensen

Social Science Electronic Publishing (SSEP), Inc.; Harvard Business School; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI)

April 2001

Harvard NOM Working Paper No. 04-27

I have long supported increased managerial holdings of equity to reduce the conflicts of interest between stockholders and their agent managers. Yet I recommend that a company never again issue another typical standard executive stock option. The vast increase in the use of options in managerial compensation plans in the last decade does not suffice to identify managers' interests with those of their stockholders and with that of society. My purpose here is to call attention to the fact that typical executive stock options are not structured properly and as a result reward managers for taking actions that destroy value. I also outline how the cost of capital adjusted options first suggested by Stewart (1990) can resolve these problems and recommend that newly awarded executive stock options be structured this way.

Number of Pages in PDF File: 11

Keywords: Performance Measurement, compensation, rewards, value destruction

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Date posted: March 3, 2005  

Suggested Citation

Jensen, Michael C., How Stock Options Reward Managers for Destroying Value and What To Do About It (April 2001). Harvard NOM Working Paper No. 04-27. Available at SSRN: http://ssrn.com/abstract=480401 or http://dx.doi.org/10.2139/ssrn.480401

Contact Information

Michael C. Jensen (Contact Author)
Social Science Electronic Publishing (SSEP), Inc. ( email )
7858 Sanderling Road
Sarasota, FL 34242
United States
617-510-3363 (Phone)
305 675-3166 (Fax)
HOME PAGE: http://ssrn.com/author=9

Harvard Business School ( email )
Soldiers Field
Negotiations, Organizations & Markets
Boston, MA 02163
United States
617-510-3363 (Phone)
305-675-3166 (Fax)
HOME PAGE: http://drfd.hbs.edu/fit/public/facultyInfo.do?facInfo=ovr&facId=6484
National Bureau of Economic Research (NBER) ( email )
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
European Corporate Governance Institute (ECGI) ( email )
B-1050 Brussels
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