Book contents
- Frontmatter
- Contents
- Acknowledgments
- Prologue: The Compensation Committee Meets
- Introduction: The Battle over Executive Compensation
- 1 The Myths and Realities of Pay-for-Performance
- 2 Managerial Power
- 3 External Pressures: The New Context for Executive Compensation
- 4 End of an Era: The Decline of the Stock Option
- 5 The Future of Long-Term Incentives
- 6 Executive Stock Ownership: The Solution to the Executive Compensation Crisis
- 7 Director Compensation in the New Environment
- 8 The Compensation Committee: Creating a Balance between Shareholders and Executives
- 9 Aligning All Employee Pay to Improve Corporate Performance
- 10 International Executive Pay Comparisons
- Conclusion: The Future of Executive Compensation
- Epilogue: Back in the Boardroom
- Appendix A Legal and Regulatory Requirements for Executive Compensation Plans
- Appendix B Summary of the Regulatory and Institutional Mandates and Recommendations
- Appendix C Academic Articles on Pay-for-Performance and the Effectiveness of the Executive Labor Market
- Notes
- Index
6 - Executive Stock Ownership: The Solution to the Executive Compensation Crisis
Published online by Cambridge University Press: 31 July 2009
- Frontmatter
- Contents
- Acknowledgments
- Prologue: The Compensation Committee Meets
- Introduction: The Battle over Executive Compensation
- 1 The Myths and Realities of Pay-for-Performance
- 2 Managerial Power
- 3 External Pressures: The New Context for Executive Compensation
- 4 End of an Era: The Decline of the Stock Option
- 5 The Future of Long-Term Incentives
- 6 Executive Stock Ownership: The Solution to the Executive Compensation Crisis
- 7 Director Compensation in the New Environment
- 8 The Compensation Committee: Creating a Balance between Shareholders and Executives
- 9 Aligning All Employee Pay to Improve Corporate Performance
- 10 International Executive Pay Comparisons
- Conclusion: The Future of Executive Compensation
- Epilogue: Back in the Boardroom
- Appendix A Legal and Regulatory Requirements for Executive Compensation Plans
- Appendix B Summary of the Regulatory and Institutional Mandates and Recommendations
- Appendix C Academic Articles on Pay-for-Performance and the Effectiveness of the Executive Labor Market
- Notes
- Index
Summary
These results illustrate that when managers with below-equilibrium equity ownership are required to increase their ownership levels, there are improvements in firm performance.
John E. Core, professor of accounting, Wharton School, University of Pennsylvania, and David F. Larcker, professor of accounting, Graduate School of Business, Stanford UniversityA basic assumption of executive compensation – that more stock ownership is better than less – is as solid as the theory that supports it. The theory is that companies flourish if their executives act like owners rather than hired hands. If the executives own only a small amount of stock in the company, their self-interest may be paramount and not completely aligned with the interests of the shareholders. However, we also need to factor in the desire of executives to have a balanced personal portfolio.
Companies use a number of techniques, such as stock options and cash incentives, to push executives to “act” like owners. However, companies can make them actual owners through stock ownership. But does executive ownership really work? And how does a company get its executives to take on the added risk of owning high levels of stock in the company?
Agency theory and costs
In 1932, Adolph Berle and Gardiner Means articulated for the first time “agency theory” and its implication for corporate America. This theory describes the conflicts of interest or gaps that naturally occur between economic principals (typically, owners and shareholders) and their agents who run the organizations (typically, employees or executives).
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- Myths and Realities of Executive Pay , pp. 107 - 122Publisher: Cambridge University PressPrint publication year: 2007