Contemporary Issues Of Finance And Its Impact On The Growth Of Executive Compensation

1524 Words7 Pages
Contemporary Issues in Finance INTRO and explain options Part one, describe the role of stock options in the growth of executive compensation over last 20 years. The growth of executive compensation has been a topic of much dispute over the recent years (Bebchuk and Grinstein, 2005) due to the excess in which is paid out to executives in businesses that perform well or even poorly. There has been an undisputed rise in the level of chief executive compensation (Murphy, 1998). Since 1990 compensation levels to CEO’S and the top 5 executives has climbed considerably (Bebchuk and Grinstein, 2005). Bebchuk and Grinstein examine information about top level executive compensation covering the S&P500, Mid-Cap 400 and Small-Cap 600 companies. They…show more content…
Firstly, it was well believed that this form of compensation would tie together company performance and executive pay via increasing executive compensation sensitivity to company stock price movements (Murphy, 1998). Options give executives a greater incentive to operate in favour of shareholders by providing a direct link between compensation and stock performance (Hall and Murphy, 2003). Stock options also give the company that is issuing them what is effectively free employment as they are replacing base salary with options that will not be paid out until they have vested for a number of years. This benefits the company and shareholders as it allows less cost and therefore more revenue for the year so stock prices rise (Hall and Murphy, 2003), however this is a disputed reason and many view this as a greater cost to companies rather than a benefit ( LIST NAMES ). Further, anther role that was played by executive options which led to their subsequent rise in use was the belief that they would attract and retain talent within the company (Hall and Murphy, 2003). Stock options usually have a vesting period of around 10 years before they could be utilised by the executive, this option was usually forgone if the executive left the company before the options had vested. This provides a financial incentive foe executives to remain in the company for long periods of time. As we will see later in this paper however, there were many flaws
Open Document