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.
ASJC Scopus subject areas
- Business and International Management
- Strategy and Management