Are We Getting More Sensible About Management Incentives?
Respondents to this month's column suggest ways of fixing or selectively using various methods of providing incentives to management. They join the chorus of voices expressing, in one way or another, the view that the use of options should be rethought in many organizations.
First, there is the issue of whether options are the best means of promoting shareholders' best interests in established companies. While making an exception for "cash-poor start-up companies where stock options can provide a valuable way to align key personnel to the development and survival of the business," Shann Turnbull suggests that cash bonuses may be a better alternative in established, cash-rich companies, where "bonuses eliminate the problem of valuing options or misleading investors."
One possible way of aligning management's actions with the long-term interests of an organization and its investors is, of course, to delay payment of options until long-term performance has been proven. Charlie Cullinane suggests, for example, that an organization should "delay payment of any option until five years after a recipient leaves the company or fully retires."
Measures on which options are based also came under fire. As Moris Simson pointed out, "In the last few years our society has ... ignored the need to have satisfied customers, employees and other parties to make a company truly successful. As long as stock options are so directly linked to company valuation alone (i.e. uni-dimensional) the system might be open to inevitable abuse."
Some might argue that these well-intended suggestions either ignore or reduce the value of options as an incentive. But do they? The point is, do we really know? Has enough attention been focused on what is an admittedly difficult issue to examine, considering that compensation is only one of many factors in an organization's performance? Given the fact that we're talking about tens of billions of dollars of either real or lost value here, does the matter warrant more careful investigation? Or must we continue to rely on the compensation consulting community to guide us in these matters? What do you think?