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 journalArticle

16 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

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