When Boeing CEO Dennis Muilenburg was ousted from the company for his mismanagement of the 737 Max crisis, he left with stock options worth at least a net $18.5 million. At the same time, Boeing’s shareholders took a beating, with the stock losing 25% of its value. Muilenburg, in other words, left with a big payout of options even though his former firm’s performance was cratering. Such discrepancies between firm performance and CEO compensation are unfortunately all too common, and is largely the result of the indiscriminate awarding of stock options and other incentive compensation.
Should You Reward Your CEO with Stock Options?
The record is spottier than you might think.
January 29, 2021
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Summary.
Stock options are both widely used and widely questioned. Research demonstrates that, contrary to stock option boosters, this form of CEO compensation is not a panacea, and there exist situations where issuing them is damaging. Indeed, now that the accounting profession has established that stock options are a real cost to business, either these expenditures should lead to real returns to shareholders or they should not be made. But contrary to across-the-board critics of options, where the potential for CEO opportunism is high, stock options can be a useful tool to align top managers’ interests with those of their bosses: the firm’s shareholders. Thus, rather than being “good for what ails you,” this study suggests that CEO stock options should be “taken only when needed.”