Topic5-MalayMondal

Encouraging executives to take excessive risks at the

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Unformatted text preview: tives excessively in the boom market 5. Failure to penalize bad performance by resetting option price in the down market 6. Encouraging executives to take excessive risks at the cost of the shareholders Few more points have been identified by Rebeiz (2009). He has also categorized the problematic issues with ESO in three major heads – cost, incentive and moral hazard (see Appendix I). 3.3 Different ESO Policies The following table summarises different existing ESO policies and the issues pertaining to them. Policy Issue Remedy Policy Issue Remedy Policy Issue Remedy Policy Standard compensation plan with short term strike period • Executives are motivated more on short term growth at the price of long term value of the firm to fulfil their vested interest • Aligning compensation with “long term value and soundness of the firm” 3 • Banking regulators to monitor compensation structures to align with good risk management 4 • Limitations on unwinding decisions Rewarding executives for short term result; yearly stock unwinding option • Managers may take risky decisions which will increase the stock price in short duration • Manager may indulge himself in “window dressing” • Separating vesting and freedom to unwind • Limitation on unwinding Retirement based holding requirement as in Exxon Mobil, Citigroup, Deere • Motivate an executive to retire early though she has much left to give to the firm • May lead the most successful executive with high unliquidated equity to retire • Executive will put excessive weight on short term result in the last few years of his retirement • Make the executives to hold the shares for 2-3 more years after their retirement Grant based limitations on unwinding; allow an executive to unload more and more 2 Choe and Yin Dec – 2006, “Should executive stock options be abandoned?”, Australian Journal of Management 3 US Dept of the Treasury 4 Enhancement to the Basel II framework 6 | P a g e Issue Remedy equity as time passes from the vesting date as in GE, P&G etc • Required holding period after the vesting period tends to be small • Make stock disposable all at once as happened in Lehman Brothers and Bea...
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This document was uploaded on 01/14/2014.

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