Question

10. In a typical large corporation, the majority of the chief executive’s pay is tied to the company’s stock price. What are some benefits of this pay strategy? Some risks? How can organizations address the risks?

Answer 1

Organizations incentivize employees to perform better in variety of methods. Linking compensation to an individual performance or group performance or to the performance of an organization are few methods. Generally, in large corporations the majority of the chief executive’s pay is linked to the company’s stock price. The company's stock price is one of the measure of the performance of an organization.

When a chief executive’s pay is linked to the company’s stock price, it is helpful to the organization. Majority of the decisions taken by the chief executive directly impact the stock price of an organization and profits of an organization. When a chief executive’s pay is linked to the stock price, he or she would be more cautious about the decisions taken. He or she would also work harder for the overall improvement of the organization. This type of compensation would make chief executive own the company and give his or her best to improve the position of the company.

There are also a few risks involved when compensation is linked to the stock price. Chief executives may try to manipulate the stock prices in order to gain more incentives. When such manipulations become public, it would create a very bad image of the company and also stock prices may fall rapidly. To reduce such a risk , the decisions of the chief executive have to be continuously monitored by the board and also the company should have a strong audit system to check such manipulations. Punishments faced by the chief executives upon being caught for such fraudulent activities must be very strict and severe.