Incentive alignment or perverse incentives? A behavioral view of stock options

Bartolomé Deyá-Tortella, Luis Gomez-Mejia, Julio O. De Castro, Robert M. Wiseman

Research output: Contribution to journalArticlepeer-review

17 Scopus citations

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.

Original languageEnglish (US)
Pages (from-to)109-120
Number of pages12
JournalManagement Research
Volume3
Issue number2
DOIs
StatePublished - 2005
Externally publishedYes

ASJC Scopus subject areas

  • Business and International Management
  • Strategy and Management

Fingerprint

Dive into the research topics of 'Incentive alignment or perverse incentives? A behavioral view of stock options'. Together they form a unique fingerprint.

Cite this