Standard pay arrangements give executives broad discretion over when they sell shares and exercise options awarded to them as part of compensation plans. But such discretion is both unnecessary and counterproductive, while removing it would enhance the performance of firms – and thus value for shareholders.
CAMBRIDGE – Executive compensation is now a central concern of company boards and government regulators. There is an aspect to this debate, however, that deserves greater scrutiny: the freedom of executives to pick the moment when they can cash out on their equity-based incentives. Standard pay arrangements give executives broad discretion over when they sell shares and exercise options that have been awarded to them. Such discretion is both unnecessary and undesirable.
The freedom to time the moment they cash out enables executives to use the special knowledge they have about their companies to sell before a stock-price decline. Although insider-trading laws supposedly prevent executives from using “hard” material information, executives usually also have “soft” information at their fingertips which gives them an advantage over the market. Indeed, it is a well documented fact that executives make considerable “abnormal” profits – that is, above-market returns – when trading in their own firms’ stock.
A second problem with executives being free to time the sales of their stock options and shares is that such freedom provides them with an incentive to use their influence over company disclosures to rig the stock price from declining before they execute their trades. Empirical studies have identified a connection between the level of executive selling and earnings manipulation – both legal and illegal.
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It is hard to reconcile the jubilant mood of many business leaders with the uncertainty caused by the war in Ukraine. While there are some positive signs of economic recovery, a sudden escalation could severely destabilize the global economy, cause a stock market crash, and accelerate deglobalization.
warns that the Ukraine war and economic fragmentation are still jeopardizing world growth prospects.
The nation that went to the gates of Moscow in World War II has become as aggressive as a cuddly cat. But with its decision to send Leopard 2 battle tanks to Ukraine, Germany's "culture of reticence," particularly with respect to Russia, may soon be a thing of the past.
examines the origins and implications of the landmark decision to send battle tanks to Ukraine.
CAMBRIDGE – Executive compensation is now a central concern of company boards and government regulators. There is an aspect to this debate, however, that deserves greater scrutiny: the freedom of executives to pick the moment when they can cash out on their equity-based incentives. Standard pay arrangements give executives broad discretion over when they sell shares and exercise options that have been awarded to them. Such discretion is both unnecessary and undesirable.
The freedom to time the moment they cash out enables executives to use the special knowledge they have about their companies to sell before a stock-price decline. Although insider-trading laws supposedly prevent executives from using “hard” material information, executives usually also have “soft” information at their fingertips which gives them an advantage over the market. Indeed, it is a well documented fact that executives make considerable “abnormal” profits – that is, above-market returns – when trading in their own firms’ stock.
A second problem with executives being free to time the sales of their stock options and shares is that such freedom provides them with an incentive to use their influence over company disclosures to rig the stock price from declining before they execute their trades. Empirical studies have identified a connection between the level of executive selling and earnings manipulation – both legal and illegal.
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