Executive Compensation: Designing Stock-Based Incentives That Fit

Article excerpt

Stock-based incentives are used in executive compensation packages with the intent of motivating executives to align their actions with shareholder interests. The effectiveness of these rewards, say Benjamin Dunford, Wendy Boswell and John Boudreau, in a recent study published in Human Resource Management, may be mitigated by stock price expectancy, the degree to which executives believe their actions can actually influence the stock price. The underlying theory is that the higher the stock price expectancy of the executive, the more likely the stock reward will achieve its intended motivational value. To test the theory, Dunford and colleagues conducted a study of 349 high level executives in the United States. Findings of the study revealed four factors as influential in executive stock price expectancy. They are (1) employment at the corporate headquarters (i.e. those employed in corporate headquarters perceived greater impact on stock price than those employed in a division, unit or subsidiary of the company), (2) firm size (i.e. those in smaller organizations perceived themselves as having greater influence on stock price than those in larger firms), (3) hierarchical level (i.e. those at higher levels in the organization perceived greater influence on stock price than those at lower levels), and (4) interaction with investment analysts (i. …