[lbo-talk] The inefficiency of the share option incentive

Julian Gollop gollop at bol.bg
Sun Apr 9 13:44:26 PDT 2006


I just finished reading Stiglitz's 'The Roaring Nineties'. It's a nice little book - nothing terribly deep - but a good economic survery of the 90s boom and bust. One thing that struck me as quite horrifyingly inefficient in the current corporate system is the use of share options for CEOs. Stiglitz goes on about the importance of effective incentives, and this is one example of something so egregiously inefficient that any apologist for capitlism would surely be quite worried? I didn't realise the extent to which this system was used to deceive shareholders, due to the fact that the share options were not reported as an expense in corporate accounts. Plus, many CEOs and other senior execs did everything possible to push the share price up, to the extent of deceiving the shareholders, then exercised their share options and sold their shares when they realised the whole house of cards was about to fall. Maybe the 90s bubble, with many so-called 'new economy' corporations was an exceptional situation, where in the absence of any foreseeable profits in the near future, the mythologizing about new technology and the rush for 'first mover advantage' meant that the share price was king? Or maybe various methods of share price manipulation are very widespread for a whole variety of reasons and in different situations? And what has actually been done about it since the bubble burst? Stiglitz says he has great faith in markets, as long as they are properly regulated, but his book is such and effective horror story that his prescriptions seem a little vague and under whelming.

Julian Gollop



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