16-5 Stock Options 2

16-5 Stock Options 2 - Too much of a good Incentive? Stock...

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Unformatted text preview: Too much of a good Incentive? Stock Options, Symbols of a Com- pensation System gone Haywire, are coming under new Scrutiny Source: Business Week, 4 March 2002 Stock options. The very term conjures up the promise of the heady 1990s. They were the juice that helped fuel what was then called the dot-com revolution. They were a powerful magnet that few could resist: Remember the torrent of seasoned executives at old- line companies who left solid career tracks for giant slugs of stock options at tiny, unproven entrepreneu- rial companies? Large corporations, too, doled out options in ever-increasing quantities to keep their bright execs from fleeing to greener pastures. For a time, with the bull market raging, everyone, it seemed, was either getting options or trying to. The craze seemed to validate some basic tenets of a newly energized economy: Executives and, later, workers of all levels, were all too eager to accept options in lieu of raises, cash bonuses, or even sala- ries. The theory was that by taking such a risk, man- agers and workers alike would work harder, achieve superior performance, and strike it rich when options soared well past their strike prices to dizzying heights. Economists and corporate governance ex- perts also embraced the concept: Since options only pay off big if a stock rises, the interests of managers who receive options grants would be more closely aligned with shareholders interests, and they would be motivated to do whatever it took to boost produc- tivity, profits, and shareholder return. Overall, what the U.S. got in the 90s is exactly what options promised: faster productivity growth, a sharp focus on innovation, and higher share prices. Even with the market slide of the last two years, the S&P 500-stock index has roughly tripled since the begin- ning of the 90s. Its impossible to gauge how much of those gains can be attributed to the use of options. Still, theres little doubt that options played a huge role. On average, stock options were good for the typical American company and the U.S. economy, says Ira T. Kay, compensation practice director at Watson Wyatt & Co. Watson Wyatt & Co....
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This note was uploaded on 05/03/2010 for the course ACCT 202 taught by Professor Yang during the Spring '10 term at UPenn.

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16-5 Stock Options 2 - Too much of a good Incentive? Stock...

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