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

11 Pages Posted: 3 Mar 2005  

Michael C. Jensen

SSRN; Harvard Business School; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI); Harvard University - Accounting & Control Unit

Date Written: April 2001

Abstract

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.

Keywords: Performance Measurement, compensation, rewards, value destruction

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: https://ssrn.com/abstract=480401 or http://dx.doi.org/10.2139/ssrn.480401

Michael C. Jensen (Contact Author)

SSRN ( email )

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305 675-3166 (Fax)

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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 )

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European Corporate Governance Institute (ECGI) ( email )

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Belgium

Harvard University - Accounting & Control Unit ( email )

Soldiers Field
Boston, MA 02163
United States

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