May 2, 2018
Does Cutting Options Make Execs Too Cautious?
– Liz Dunshee
A lot of ink has been spilled (or keyboards clacked?) on how to avoid pay structures that encourage excessive risk-taking. But we can probably all agree with that old sage Mark Zuckerberg – “the biggest risk is not taking any risk.” And that’s what makes this research interesting. Here’s an excerpt:
When options packages shrink, managers reduce their companies’ operating leverage, a form of risk, the findings suggest. The change effectively turns these organizations into more conservative investments.
Operating leverage, a ratio of a company’s fixed versus variable costs, falls as the firm’s income becomes more predictable, or less risky. Corporations in the study experienced lower earnings variability, lower stock return volatility and a marginal decline in profitability growth when they significantly reduced option-based compensation.
Things like this make it harder to explain why ISS won’t count standard options as “performance-conditioned”…