The Original Management incentives原有的管理激励.pptVIP

The Original Management incentive Schemes Introduction Some of the criticisms of modern stock-option dominated schemes are as follows. First, stock options are worth nothing if the stock price doesn’t rise above the exercise level This may encourage excessive risk-taking. Second, options where the actual stock price falls far below the exercise price may provide little incentive. If prices are reset, it may lead to moral hazard. Third, options can encourage over-retention of earnings, since option holders do not receive dividend payments on their options. Fourth, due to managerial risk aversion, the value of options to managers may be far less than the cost of such options to the company. Fifth, the vesting periods of stock option plans are often relatively short, causing management to focus on short-run rather than long-run value creation. Sixth, stock option plans reward or penalize managers primarily for whether they are in charge at a time when the stock market is generally rising or generally falling—not according to whether they perform relatively well compared to other firms. Flashback The structure of the Du Pont and General Motors management incentive plans in the 1920s and 1930s minimized many of these problems. The use of stock meant that managers faced both upside benefit and downside risk at all times according to the movements of a company’s stock price. The length of the schemes, running for seven or more years, encouraged management to take a long-term focus. More in common with Private Equity In fact, the Du Pont and GM schemes had more in common with management incentive schemes provided by many of today’s private equity (PE) funds. PE incentive packages often have a time horizon of five years or more and require management to purchase a substantial amount of equity out of their own pocket. The PE funds often also provide upside incentives through stock options where the exercise price is set well above the current market price,