Stock options can be made to better align management with shareholders… but not the conventional kind

SINGAPORE (June 4): Last November, I wrote an article questioning whether existing stock option plans were good for shareholders. I have no doubt that the theoretical proposition is valid: that if the interests of senior management are aligned with those of shareholders through long-term incentives, they will work towards achieving a company’s strategic objectives to enhance value.

The question is whether the facts validate the proposition. And if they do not, why not?

Our quick analysis using the 30 component stocks of the Dow Jones Industrial Average failed to validate any relationship between the size of stock-based compensation and stock-price performance or the company’s profitability. Instead, it showed companies took on higher leverage or risks.

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