Stock Options for Top Managers — The Possibilities and Limitations of a Motivational Tool

Abstract

Relying solely on extrinsic motivational incentives creates both problems and unintentional results. This chapter will demonstrate this, using the example of stock options for top managers. The widespread practice of granting stock options is based on the idea that managers will thus be motivated to gear their interest and activities toward increasing the value of their company. Until now, this connection has been hard to document. In our empirical research, we find that stock options moreover have an unintentional negative impact. They enable top-level managers who are not sufficiently supervised to amass large incomes at the owners’ expense. Stock options allow managers to act in a selfish manner and may even encourage such behavior. Therefore, the complex task of motivating managers cannot be reduced to simple extrinsic incentives. On the contrary, new, alternative motivational tools should be actively sought out.