September 14, 2015
Consumer Safety: What’s Options Got to Do With It?
– Broc Romanek, CompensationStandards.com
Can’t shake Tina Turner’s song off my mind after reading this NY Times column yesterday by Gretchen Morgenson entitled “Safety Suffers as Stock Options Propel Executive Pay Packages” that analyzes this study showing a correlation between a high proportion of stock options relative to total CEO pay and the incidence of serious product recalls. Here’s an excerpt from this article:
“Specifically, we found a positive relationship between the proportion of CEO pay consisting of stock options, measured over a two-year period, and the occurrence of product recalls in the subsequent year,” said Adam Wowak, the study’s lead author. “Our results are consistent with prior research showing that option-heavy pay arrangements engender aggressive risk-taking by CEOs, who stand to benefit greatly from future increases in share prices but lose nothing if share prices fall.”
The researchers theorized that higher levels of stock option pay would cause CEOs to favor aggressiveness over thoroughness in their decisions, a consequence of which would be a higher likelihood of mistakes in the design, production and distribution of products. “This isn’t to say that CEO options are always the culprit when product recalls occur, but our findings suggest that recalls can potentially be an unintended consequence of using options to motivate risk-taking in CEOs,” Adam Wowak said.