Question

Some companies compensate their CEOs (and some senior executives) with stock issued at the end of the year, in addition to a regular salary. The idea is that the CEO is better incentivized to serve the interests of the shareholders by ensuring the price of the stock increases. What might be some unintended consequences of this plan?

Answer 1

CEO's are often given high salaries which they get irrespective of the fact company performing poorly or well. Following are some negative aspects of such a plan:

• Stock options can cause CEO's to focus on short-term performance or to manipulate numbers to meet targets.In the long term this will impact the performance of firm.
• Executives act more like owners when they have a stake in the business in the form of stock ownership.
• Bonus plans that are linked to performance of company will encourage CEO's to perform better and make better decisions for stockholders.
• Employees working hard and skillfully who are the real heroes are ignored or compensated less under such a system while CEO's are compensated adequately who already have high salaries. Such a system leads to inequality and dissatisfaction among employees in the long run.
• Pay for performance is a compensation strategy that should be followed for all the employees equally.