Apart from that there is another type of risk which can surface even in case the market continues its upward march. In the event employees exercise their ESOPs in huge numbers, external shareholders could oppose the diluting impact of these option grants on the value of their shares. A situation might crop up that old possible tensions among employee interests and shareholder interests are not all of a sudden resolved by converting employees into shareholders. (Worker Capitalists: Giving Employees an Ownership Stake)
Regardless of various shortcomings, stock options have come to assume a popular means for aligning managers and shareholders interests alike. Benefits from availing stock options gave 70% of median CEO total direct compensation, consisting of salary, bonus, restricted stock, gains from stock option exercise and long-term incentive payouts, and fix the upper limit for the remainder of the firm's compensation system. Adhering with the conventional doctrine of the agency theory, enhancements in CEO stock options, along with effective monitoring, generate sound alignment among the interests of management and shareholders. This implies that CEOs as well as shareholders profit from the spiraling stock prices in the long-term, thus lowering the chances of moral hazard. Besides, favorably valued stock options pose risk for the CEOs. The most important problem in case of corporate governance is not whether a particular agent has integrity or otherwise, a lot of honest CEOs possibly would act in the interests of the shareholders even when given substantial incentive and scope to do something on the contrary. (Do Stock Options prevent or promote fraudulent financial reporting)
Instead, the difficulty lies with the fact whether or not in the existence of a dishonest agent a specific control system will either (i) remove the dilemma by aligning the interests of all parties or (ii) evaluate the unprincipled agent strongly to guarantee that there will be no chance for the self-interested behavior to happen. Preferably as per the principal-agent theory, CEO stock options must remove the moral impasse by aligning CEO interests with those of the shareholders, even if they might not completely do so and thus persistent monitoring by the Board of Directors is essential. A perspective is offered that as against agency theory, stock options can in fact aggravate the ethical risk confronting CEOs by providing added incentive for self-interested behaviors. This implies that when there is a chance, ESOPs will raise the chances of vested behaviors by devious CEOs, affecting the shareholders in the long run. (Do Stock Options prevent or promote fraudulent financial reporting)
The light of argument is steady with research in accounting investigating the general hypothesis that compensation plans is able to encourage CEOs to make beneficial or also deceptive decisions. For instance, evidence was found by Barton in a sample of Fortune 500 firms that cash compensation was directly linked to the application of earnings management method, whereas the value of stock owned by the CEO and the number of options held by the CEO was linked with the interest rate and foreign currency derivatives. It was Barton who arrived at the decision during 2001 that managers were deliberately managing earnings to augment their cash compensation and applying derivatives to raise the value of their stock-based compensation. Also in a research of firms readying for an IPO, it was reported by DuCharme, Malatesta and Sefcik that managers doctored the earnings to raise the amount from the IPO at the cost of investors. (Do Stock Options prevent or promote fraudulent financial reporting)
It was demonstrated by Guidry, Leona and Rock during 1999 that earnings management is linked with CEO bonuses, whereas Healy found more that the bonus plan adoptions and alterations to bonus plans are linked with modifications in earnings management. It was proven by Hirst in 1994 that bonus plans make incentives in such a manner that their bonuses would be become the greatest. Besides, even though it was found by Gerety and Lehn during 1997 that no distinct association between the application of accounting-based management compensation plans, like profit sharing, bonuses or stock options, and cases of accounting swindles, they found out that large stockholdings by a sole executive lowered the chances of deception. Therefore the accounting literature gives proof that executives might arrive at company decisions that have been designed to raise their individual wealth at the maximum point. To put it differently, managers might 'engineer' the incentive system due to lack of information symmetry and act in ways that augment their own...
Business Ethics -- Robert Nardelli Business Ethics: Robert Nardelli and Home Depot Robert Nardelli became CEO of The Home Depot in 2000, despite the fact that he had no retail experience (Grow, 2008). He had previously been in management at General Electric, and he brought the Six Sigma style he had used there over to the home improvement retailer with plans to overhaul the company and completely change the culture of it
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