Unformatted text preview: re not concerned about the downside risk. So the lenders’ interest is at stake.
Debt linked compensation takes care of this issue. Also as the lender’s incentive is tied with that of
managers, lenders feel secure about their money and hence can offer money at a lower lending rate.
This increases the bottom line of the firm and hence increases the shareholder value. In this paper I
have pointed out that neither of these two methods can give optimal result. So I recommend to tie
the compensation with performance matrix as it is under control of managers and also to do peers
comparative compensation. 3 | P a g e 1. Introduction The biggest lesson from financial meltdown is that, market is not efficient enough to use all the
available information to price the securities accurately and the vested personal interest many a times
drive the management’s policy making. This has raised a big question on the reliability of executive
stock options (ESO), the means of connecting the executive compensations with the equity stock
options. Since then academicians, policy makers and all interested parties have started looking for
something which will link the compensation not only on equity but on overall firm value. Debt
linked executive pay option is the new hot topic of debate in this regard. 2. Parameters of Executive Compensation The following four points are sacrosanct for designing a fair, accurate and effective executive
• Performance based compensation (performance measured against firms value) • Incentive for the executive to perform better • Safeguarding the shareholder’s interest • Safeguarding the outside stakeholders’ (mainly lender) interest 3. Executive Stock Options The Wikipedia defines of Executive Stock Option (ESO) as
“[ESO].. is a call option on the common stock of a company, issued as a form of noncash compensation. Restrictions on the option (such as vesting and limit...
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- Winter '14