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/lp/emerald-publishing/incentive-alignment-or-perverse-incentives-a-behavioral-view-of-stock-7Hh3AXLcub
- Publisher
- Emerald Publishing
- Copyright
- Copyright © 2005 Emerald Group Publishing Limited. All rights reserved.
- ISSN
- 1536-5433
- DOI
- 10.1108/15365430580001316
- Publisher site
- See Article on Publisher Site
Abstract
Agency theoretic models have been used in the past to justify the use of stock options as an effective incentive alignment mechanism to create a common fate between principals and agents. In this paper, we use behavioral theory to reach the opposite conclusion – namely, that the design characteristics of the typical stock option plan foster perverse incentives for loss‐averse agents, leading to decisions with detrimental consequences for principals. We also consider alternative stock option designs and other equity‐based executive compensation plans and argue that they may suffer from the same problems as traditional stock option plans – namely, that loss‐averse executives will try to protect the endowed value of that equity through self‐serving decisions that do not enhance shareholder wealth.
Journal
Management Research: The Journal of the Iberoamerican Academy of Management – Emerald Publishing
Published: Jul 1, 2005
Keywords: Agency; Incentives; Stock options; Behavioural theory; Compensation