Hendrik S. Houthakker and Peter J. Williamson
- Published in print:
- 1996
- Published Online:
- November 2003
- ISBN:
- 9780195044072
- eISBN:
- 9780199832958
- Item type:
- chapter
- Publisher:
- Oxford University Press
- DOI:
- 10.1093/019504407X.003.0008
- Subject:
- Economics and Finance, Financial Economics
The first section of this chapter discusses the basic features of option contracts, with special reference to stock options, including the way in which the contractual elements of an option (such as ...
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The first section of this chapter discusses the basic features of option contracts, with special reference to stock options, including the way in which the contractual elements of an option (such as the maturity or exercise price) have been standardized to facilitate trading. The second section examines various methods of valuing options contracts and how the value of a option will be influenced by its maturity, striking price, market interest rates and the price of the underlying security; it also explores the ways in which call and put options may be combined to form various types of ‘spreads’ and ‘straddles’. The last three sections are quite short: the third briefly analyzes the way in which options might be used to hedge a portfolio of stocks, and hence their role as a risk management tool; the fourth explains how the shares in a levered firm can themselves be viewed as a type of option, and the implications of this for the pricing of stocks; and the last discusses options on objects other than stocks. The examples given refer to the USA and Europe.Less
The first section of this chapter discusses the basic features of option contracts, with special reference to stock options, including the way in which the contractual elements of an option (such as the maturity or exercise price) have been standardized to facilitate trading. The second section examines various methods of valuing options contracts and how the value of a option will be influenced by its maturity, striking price, market interest rates and the price of the underlying security; it also explores the ways in which call and put options may be combined to form various types of ‘spreads’ and ‘straddles’. The last three sections are quite short: the third briefly analyzes the way in which options might be used to hedge a portfolio of stocks, and hence their role as a risk management tool; the fourth explains how the shares in a levered firm can themselves be viewed as a type of option, and the implications of this for the pricing of stocks; and the last discusses options on objects other than stocks. The examples given refer to the USA and Europe.
Vieri Ceriani, Stefano Manestra, Giacomo Ricotti, and Alessandra Sanelli
- Published in print:
- 2012
- Published Online:
- May 2012
- ISBN:
- 9780199698165
- eISBN:
- 9780191738630
- Item type:
- chapter
- Publisher:
- Oxford University Press
- DOI:
- 10.1093/acprof:oso/9780199698165.003.0004
- Subject:
- Economics and Finance, Financial Economics
This chapter investigates the effects of the tax system on the economic factors that triggered the financial crisis. We examine two specific cases in which the tax regime interacted with these ...
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This chapter investigates the effects of the tax system on the economic factors that triggered the financial crisis. We examine two specific cases in which the tax regime interacted with these factors, reinforcing them. First, we focus on certain aspects of the tax treatment of performance-based remuneration of managers, which, coupled with other provisions, may have fostered an ever-increasing use of these instruments, resulting in overemphasis of short-term profitability and incentive to excessive risk taking. Second, the securitization process, which played a key role in the outbreak of the financial crisis, was accompanied by opportunities for tax arbitrage and reduction of the overall tax wedge paid by investors, through offset of incomes that are ordinarily taxed at different rates; a de facto exemption of CDS premiums received by non-residents supplemented the tax arbitrage.Less
This chapter investigates the effects of the tax system on the economic factors that triggered the financial crisis. We examine two specific cases in which the tax regime interacted with these factors, reinforcing them. First, we focus on certain aspects of the tax treatment of performance-based remuneration of managers, which, coupled with other provisions, may have fostered an ever-increasing use of these instruments, resulting in overemphasis of short-term profitability and incentive to excessive risk taking. Second, the securitization process, which played a key role in the outbreak of the financial crisis, was accompanied by opportunities for tax arbitrage and reduction of the overall tax wedge paid by investors, through offset of incomes that are ordinarily taxed at different rates; a de facto exemption of CDS premiums received by non-residents supplemented the tax arbitrage.
Hersh Shefrin
- Published in print:
- 2002
- Published Online:
- November 2003
- ISBN:
- 9780195161212
- eISBN:
- 9780199832996
- Item type:
- chapter
- Publisher:
- Oxford University Press
- DOI:
- 10.1093/0195161211.003.0019
- Subject:
- Economics and Finance, Financial Economics
Option markets reflect all three behavioral themes. The chapter is organized around the way options are (1) used; (2) priced; and (3) reflect investor sentiment. The chapter begins with the popular ...
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Option markets reflect all three behavioral themes. The chapter is organized around the way options are (1) used; (2) priced; and (3) reflect investor sentiment. The chapter begins with the popular ways investors use options, where frame dependence figures prominently. The focus is on covered call writing, but also discusses how employees make decisions about exercising company stock options. In discussing pricing, the discussion emphasizes the relationship between investors' expectations about future volatility, so called “implied volatility,” and actual volatility. The point here is that heuristic‐driven bias moves implied volatility away from its objective counterpart. In other words, heuristic‐driven bias causes option markets to be inefficient. The chapter discusses two related phenomena that stem from the effect the 1987 stock market crash had on implied volatility. One is known as “crashophobia,” and the other is known as the “crash premium.” The chapter ends with a discussion about the influence investor sentiment has had on patterns of option trading.Less
Option markets reflect all three behavioral themes. The chapter is organized around the way options are (1) used; (2) priced; and (3) reflect investor sentiment. The chapter begins with the popular ways investors use options, where frame dependence figures prominently. The focus is on covered call writing, but also discusses how employees make decisions about exercising company stock options. In discussing pricing, the discussion emphasizes the relationship between investors' expectations about future volatility, so called “implied volatility,” and actual volatility. The point here is that heuristic‐driven bias moves implied volatility away from its objective counterpart. In other words, heuristic‐driven bias causes option markets to be inefficient. The chapter discusses two related phenomena that stem from the effect the 1987 stock market crash had on implied volatility. One is known as “crashophobia,” and the other is known as the “crash premium.” The chapter ends with a discussion about the influence investor sentiment has had on patterns of option trading.
John D. Martin, J. William Petty, and James S. Wallace
- Published in print:
- 2009
- Published Online:
- September 2009
- ISBN:
- 9780195340389
- eISBN:
- 9780199867257
- Item type:
- chapter
- Publisher:
- Oxford University Press
- DOI:
- 10.1093/acprof:oso/9780195340389.003.0008
- Subject:
- Economics and Finance, Macro- and Monetary Economics, Financial Economics
This chapter presents a fundamental component of every firm's internal control system, its compensation program. The basic paradigm espoused by the proponents of VBM is that what a firm measures and ...
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This chapter presents a fundamental component of every firm's internal control system, its compensation program. The basic paradigm espoused by the proponents of VBM is that what a firm measures and rewards will get done. Consequently, the compensation program must measure employees’ activities that contribute toward wealth creation and reward those efforts. In essence, the compensation plan should pay employees to think and act like owners. Both the level of compensation and its form and composition are discussed. Many observed problems and potential remedies are presented. One characteristic that firms must be aware of is the public's perception that executive compensation has become unacceptably excessive. A complete VsBM program must consider the political implications of its behavior as these perceptions can and do effect a firm's reputation and ultimately its wealth-creating ability. One mechanism for addressing these perceptions is to consider fairness criteria when designing a compensation program.Less
This chapter presents a fundamental component of every firm's internal control system, its compensation program. The basic paradigm espoused by the proponents of VBM is that what a firm measures and rewards will get done. Consequently, the compensation program must measure employees’ activities that contribute toward wealth creation and reward those efforts. In essence, the compensation plan should pay employees to think and act like owners. Both the level of compensation and its form and composition are discussed. Many observed problems and potential remedies are presented. One characteristic that firms must be aware of is the public's perception that executive compensation has become unacceptably excessive. A complete VsBM program must consider the political implications of its behavior as these perceptions can and do effect a firm's reputation and ultimately its wealth-creating ability. One mechanism for addressing these perceptions is to consider fairness criteria when designing a compensation program.
Kevin F. Hallock and Craig A. Olson
- Published in print:
- 2010
- Published Online:
- February 2013
- ISBN:
- 9780226001432
- eISBN:
- 9780226001463
- Item type:
- chapter
- Publisher:
- University of Chicago Press
- DOI:
- 10.7208/chicago/9780226001463.003.0005
- Subject:
- Economics and Finance, Microeconomics
This chapter aims to provide a review and update on some important questions in employee stock options. Several reasons are mentioned as to why learning about stock options is important for firms, ...
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This chapter aims to provide a review and update on some important questions in employee stock options. Several reasons are mentioned as to why learning about stock options is important for firms, employees, and public policymakers. The past twenty years are stated to have seen a dramatic growth in the use of stock options for senior-level executives, and, beginning in the mid-1990s, substantial growth in the use of options for nonexecutive employees that was only partially dampened by the market adjustment in 2001. Another reason is that it may provide insight into the widespread debate about the appropriate method of estimating the cost and value of options to firms. There are many strongly held opinions and new Financial Accounting Standards Board regulations on how firms should expense options, although there is no consensus on a theoretical or empirical method for estimating employee stock option costs to the firm.Less
This chapter aims to provide a review and update on some important questions in employee stock options. Several reasons are mentioned as to why learning about stock options is important for firms, employees, and public policymakers. The past twenty years are stated to have seen a dramatic growth in the use of stock options for senior-level executives, and, beginning in the mid-1990s, substantial growth in the use of options for nonexecutive employees that was only partially dampened by the market adjustment in 2001. Another reason is that it may provide insight into the widespread debate about the appropriate method of estimating the cost and value of options to firms. There are many strongly held opinions and new Financial Accounting Standards Board regulations on how firms should expense options, although there is no consensus on a theoretical or empirical method for estimating employee stock option costs to the firm.
Claus Munk
- Published in print:
- 2011
- Published Online:
- September 2011
- ISBN:
- 9780199575084
- eISBN:
- 9780191728648
- Item type:
- chapter
- Publisher:
- Oxford University Press
- DOI:
- 10.1093/acprof:oso/9780199575084.003.0015
- Subject:
- Economics and Finance, Financial Economics
Previous chapters have focused on the pricing of bonds and assets with payments determined by future interest rates. This chapter studies the impact of the shape and the dynamics of the yield curve ...
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Previous chapters have focused on the pricing of bonds and assets with payments determined by future interest rates. This chapter studies the impact of the shape and the dynamics of the yield curve on the prices of securities with payments that depend on other random variables. The present value of a security involves the discounting of the future payments, and the appropriate discount factors depend on the interest rate uncertainty as well as the correlations between interest rates and the random variables that determine the payments of the security. Particular focus is on the pricing of stock options allowing for stochastic interest rates — in contrast to the classic Black-Scholes-Merton model. General results on the pricing of options on forwards or futures are derived. The pricing of forwards, futures, and European options on a foreign currency is also discussed.Less
Previous chapters have focused on the pricing of bonds and assets with payments determined by future interest rates. This chapter studies the impact of the shape and the dynamics of the yield curve on the prices of securities with payments that depend on other random variables. The present value of a security involves the discounting of the future payments, and the appropriate discount factors depend on the interest rate uncertainty as well as the correlations between interest rates and the random variables that determine the payments of the security. Particular focus is on the pricing of stock options allowing for stochastic interest rates — in contrast to the classic Black-Scholes-Merton model. General results on the pricing of options on forwards or futures are derived. The pricing of forwards, futures, and European options on a foreign currency is also discussed.
Martin J. Conyon, Nuno Fernandes, Miguel A. Ferreira, Matos Pedro, and Kevin J. Murphy
- Published in print:
- 2013
- Published Online:
- May 2013
- ISBN:
- 9780199669806
- eISBN:
- 9780191749407
- Item type:
- chapter
- Publisher:
- Oxford University Press
- DOI:
- 10.1093/acprof:oso/9780199669806.003.0005
- Subject:
- Economics and Finance, Macro- and Monetary Economics
The chapter provides a comprehensive transatlantic comparison of pay spanning six years and covering approximately 1,500 US firms and 900 firms from nine European countries with mandated pay ...
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The chapter provides a comprehensive transatlantic comparison of pay spanning six years and covering approximately 1,500 US firms and 900 firms from nine European countries with mandated pay disclosures. The authors show that US CEOs are paid significantly more than their foreign counterparts after controlling for company size, industry, and other characteristics. Moreover, US executives receive a greater share of their compensation in the form of stock options, restricted shares, and performance-based bonuses. In the end, the authors present the evolution in the UK, France, Germany, and Italy.Less
The chapter provides a comprehensive transatlantic comparison of pay spanning six years and covering approximately 1,500 US firms and 900 firms from nine European countries with mandated pay disclosures. The authors show that US CEOs are paid significantly more than their foreign counterparts after controlling for company size, industry, and other characteristics. Moreover, US executives receive a greater share of their compensation in the form of stock options, restricted shares, and performance-based bonuses. In the end, the authors present the evolution in the UK, France, Germany, and Italy.
Robert W. Kolb
- Published in print:
- 2012
- Published Online:
- April 2015
- ISBN:
- 9780199829583
- eISBN:
- 9780190258498
- Item type:
- chapter
- Publisher:
- Oxford University Press
- DOI:
- 10.1093/acprof:osobl/9780199829583.003.0004
- Subject:
- Business and Management, Corporate Governance and Accountability
This chapter addresses the nature and complications of executive stock options (ESO). Executives seek ESO grants, but do not want the concentrated exposure of the risk to their firms. They would ...
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This chapter addresses the nature and complications of executive stock options (ESO). Executives seek ESO grants, but do not want the concentrated exposure of the risk to their firms. They would prefer the cash value of the options and are often willing to settle for the much lower intrinsic value of the options that they can secure by exercising. Exercises lessen the executive's incentives and often lead to the firm's replenishing the executive's option position by issuing new options.Less
This chapter addresses the nature and complications of executive stock options (ESO). Executives seek ESO grants, but do not want the concentrated exposure of the risk to their firms. They would prefer the cash value of the options and are often willing to settle for the much lower intrinsic value of the options that they can secure by exercising. Exercises lessen the executive's incentives and often lead to the firm's replenishing the executive's option position by issuing new options.
Leslie Berlin
- Published in print:
- 2005
- Published Online:
- September 2007
- ISBN:
- 9780195163438
- eISBN:
- 9780199788569
- Item type:
- chapter
- Publisher:
- Oxford University Press
- DOI:
- 10.1093/acprof:oso/9780195163438.003.0008
- Subject:
- History, History of Science, Technology, and Medicine
This chapter recounts Noyce's departure from Fairchild Semiconductor and his decision to launch a new company with Gordon Moore, which they named Intel. Noyce and Moore wanted potential investors to ...
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This chapter recounts Noyce's departure from Fairchild Semiconductor and his decision to launch a new company with Gordon Moore, which they named Intel. Noyce and Moore wanted potential investors to know that the company intended to fund both a stock option plan and a stock purchase plan for employees. The founders believed that stock ownership was the best guarantee of both loyalty and innovation.Less
This chapter recounts Noyce's departure from Fairchild Semiconductor and his decision to launch a new company with Gordon Moore, which they named Intel. Noyce and Moore wanted potential investors to know that the company intended to fund both a stock option plan and a stock purchase plan for employees. The founders believed that stock ownership was the best guarantee of both loyalty and innovation.
Robert Buchele, Douglas L. Kruse, Loren Rodgers, and Adria Scharf
- Published in print:
- 2010
- Published Online:
- February 2013
- ISBN:
- 9780226056951
- eISBN:
- 9780226056968
- Item type:
- chapter
- Publisher:
- University of Chicago Press
- DOI:
- 10.7208/chicago/9780226056968.003.0012
- Subject:
- Economics and Finance, Economic History
This chapter addresses several questions surrounding employee stock ownership as a wealth-sharing tool. It discusses how much on average do employee owners own in “shared capitalist” firms (those ...
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This chapter addresses several questions surrounding employee stock ownership as a wealth-sharing tool. It discusses how much on average do employee owners own in “shared capitalist” firms (those with broad-based employee ownership, profit sharing, gain sharing, and/ or stock options). It explores how company stock distributed among employee-owners, which ownership structures distribute wealth most equitably, and how the distribution of employee stock ownership wealth compares to the distribution of wealth among US households. Further, the extent of employer stock substitute for other forms of compensation (higher pay and benefits) and for other forms of wealth is discussed. It also describes the effect of universal employee ownership of employer stock on the overall distribution of stock ownership and pension wealth in the United States. Results indicated that broad-based employee ownership may be raising wealth for many workers without unduly increasing worker risk.Less
This chapter addresses several questions surrounding employee stock ownership as a wealth-sharing tool. It discusses how much on average do employee owners own in “shared capitalist” firms (those with broad-based employee ownership, profit sharing, gain sharing, and/ or stock options). It explores how company stock distributed among employee-owners, which ownership structures distribute wealth most equitably, and how the distribution of employee stock ownership wealth compares to the distribution of wealth among US households. Further, the extent of employer stock substitute for other forms of compensation (higher pay and benefits) and for other forms of wealth is discussed. It also describes the effect of universal employee ownership of employer stock on the overall distribution of stock ownership and pension wealth in the United States. Results indicated that broad-based employee ownership may be raising wealth for many workers without unduly increasing worker risk.
Robert W. Kolb
- Published in print:
- 2012
- Published Online:
- April 2015
- ISBN:
- 9780199829583
- eISBN:
- 9780190258498
- Item type:
- chapter
- Publisher:
- Oxford University Press
- DOI:
- 10.1093/acprof:osobl/9780199829583.003.0003
- Subject:
- Business and Management, Corporate Governance and Accountability
This chapter analyzes the CEO's pay package and how different elements play an incentivizing role. The typical executive pay package consists of many elements with different effects on the ...
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This chapter analyzes the CEO's pay package and how different elements play an incentivizing role. The typical executive pay package consists of many elements with different effects on the executive's incentives. Of the various elements of pay, the equity portion is the main vehicle through which the firm seeks to give the executive incentives for long-term value maximization. The two principal equity vehicles are “restricted stock” and “executive stock options” (ESO). The restricted stock is straightforward in design with a purely linear payoff structure, while ESOs are much more complicated.Less
This chapter analyzes the CEO's pay package and how different elements play an incentivizing role. The typical executive pay package consists of many elements with different effects on the executive's incentives. Of the various elements of pay, the equity portion is the main vehicle through which the firm seeks to give the executive incentives for long-term value maximization. The two principal equity vehicles are “restricted stock” and “executive stock options” (ESO). The restricted stock is straightforward in design with a purely linear payoff structure, while ESOs are much more complicated.
William K. Tabb
- Published in print:
- 2012
- Published Online:
- November 2015
- ISBN:
- 9780231158428
- eISBN:
- 9780231528030
- Item type:
- chapter
- Publisher:
- Columbia University Press
- DOI:
- 10.7312/columbia/9780231158428.003.0002
- Subject:
- Political Science, Political Theory
This chapter introduces a social structure of accumulation (SSA) theoretical framework for comparing and contrasting the institutional norms of the post-World War II period and the era of global ...
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This chapter introduces a social structure of accumulation (SSA) theoretical framework for comparing and contrasting the institutional norms of the post-World War II period and the era of global neoliberalism. The SSA framework suggests that periods of growth require a coherent set of mutually reinforcing institutions favorable to capital accumulation. These involve the creation of relatively lasting accommodations between contesting social forces, including stable understandings between capital and labor, the United States and the rest of the world, capital and the state, capitalists and other capitalists, and citizens and their government. Institutional stability provides conditions under which the behavior of others, the meaning of events, and the likely outcome of actions can be predicted over the relevant planning horizon with enough confidence to provide consistent expectations, and so encourage investment and promote growth. This chapter examines the financialization and commercial banking that have accompanied major periods of economic restructuring, the change in significance of stock options over the neoliberal era, the use of accounting for corporate profits, and the restructuring of financialization.Less
This chapter introduces a social structure of accumulation (SSA) theoretical framework for comparing and contrasting the institutional norms of the post-World War II period and the era of global neoliberalism. The SSA framework suggests that periods of growth require a coherent set of mutually reinforcing institutions favorable to capital accumulation. These involve the creation of relatively lasting accommodations between contesting social forces, including stable understandings between capital and labor, the United States and the rest of the world, capital and the state, capitalists and other capitalists, and citizens and their government. Institutional stability provides conditions under which the behavior of others, the meaning of events, and the likely outcome of actions can be predicted over the relevant planning horizon with enough confidence to provide consistent expectations, and so encourage investment and promote growth. This chapter examines the financialization and commercial banking that have accompanied major periods of economic restructuring, the change in significance of stock options over the neoliberal era, the use of accounting for corporate profits, and the restructuring of financialization.
Robert W. Kolb
- Published in print:
- 2012
- Published Online:
- April 2015
- ISBN:
- 9780199829583
- eISBN:
- 9780190258498
- Item type:
- chapter
- Publisher:
- Oxford University Press
- DOI:
- 10.1093/acprof:osobl/9780199829583.003.0005
- Subject:
- Business and Management, Corporate Governance and Accountability
This chapter examines how various constituencies interact and respond to the incentive-compensation schemes that firms adopt. The major elements of the CEO pay package that vary with the current ...
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This chapter examines how various constituencies interact and respond to the incentive-compensation schemes that firms adopt. The major elements of the CEO pay package that vary with the current year's stock market results are the value of the CEO's restricted stock and executive stock options (ESO) holdings. The value of ESOs and restricted stock strongly vary with day-to-day stock price movements, but cash receipts by the CEO may not be directly linked to stock price movements. If a CEO sells formerly restricted stock or exercises vested ESOs when the stock market is down, receipts from the sources may be high when the stock market is performing poorly.Less
This chapter examines how various constituencies interact and respond to the incentive-compensation schemes that firms adopt. The major elements of the CEO pay package that vary with the current year's stock market results are the value of the CEO's restricted stock and executive stock options (ESO) holdings. The value of ESOs and restricted stock strongly vary with day-to-day stock price movements, but cash receipts by the CEO may not be directly linked to stock price movements. If a CEO sells formerly restricted stock or exercises vested ESOs when the stock market is down, receipts from the sources may be high when the stock market is performing poorly.
Douglas L. Kruse, Richard B. Freeman, and Joseph R. Blasi
- Published in print:
- 2010
- Published Online:
- February 2013
- ISBN:
- 9780226056951
- eISBN:
- 9780226056968
- Item type:
- chapter
- Publisher:
- University of Chicago Press
- DOI:
- 10.7208/chicago/9780226056968.003.0009
- Subject:
- Economics and Finance, Economic History
This chapter analyzes the relationship of shared capitalism programs to a range of employee outcomes: participation in decisions, supervision, training, company treatment of employees, pay, job ...
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This chapter analyzes the relationship of shared capitalism programs to a range of employee outcomes: participation in decisions, supervision, training, company treatment of employees, pay, job security, and job satisfaction by using the General Social Survey (GSS) and NBER data sets. Profit sharing is stated to be most consistently linked to the positive outcomes, although gain-sharing, stock options, and employee ownership also affect some outcomes positively. In many cases the positive effect was tied to simply being covered by a policy, but there were also many cases in which the effect was tied to the size of the financial stake involved. Those who are covered by the combination of high-performance policies with shared capitalism are most likely to report high participation in decisions, satisfaction with participation, and overall job satisfaction. The combination of close supervision with shared capitalism, however, has negative effects on almost every outcome.Less
This chapter analyzes the relationship of shared capitalism programs to a range of employee outcomes: participation in decisions, supervision, training, company treatment of employees, pay, job security, and job satisfaction by using the General Social Survey (GSS) and NBER data sets. Profit sharing is stated to be most consistently linked to the positive outcomes, although gain-sharing, stock options, and employee ownership also affect some outcomes positively. In many cases the positive effect was tied to simply being covered by a policy, but there were also many cases in which the effect was tied to the size of the financial stake involved. Those who are covered by the combination of high-performance policies with shared capitalism are most likely to report high participation in decisions, satisfaction with participation, and overall job satisfaction. The combination of close supervision with shared capitalism, however, has negative effects on almost every outcome.
Eric W Orts
- Published in print:
- 2013
- Published Online:
- September 2013
- ISBN:
- 9780199670918
- eISBN:
- 9780191749599
- Item type:
- chapter
- Publisher:
- Oxford University Press
- DOI:
- 10.1093/acprof:oso/9780199670918.003.0008
- Subject:
- Business and Management, Organization Studies
This chapter provides two practical applications of the legal theory of the firm elucidated in the book. One controversial issue addressed is executive compensation in corporations, which many ...
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This chapter provides two practical applications of the legal theory of the firm elucidated in the book. One controversial issue addressed is executive compensation in corporations, which many observers believe has become disproportionate in some countries and within some firms. The chapter shows how some influential economic theories adopted simplistic “principal–-agent” prescriptions which contributed to imbalance and injustice in contemporary compensation practices (e.g. through the careless use of stock options). An institutional legal theory offers a corrective to this approach.A second controversial issue involves the political free-speech rights of corporations and other “business persons,” such as addressed in the controversial Citizens United case. The chapter argues that an institutional legal theory of the firm can deepen analysis and understanding on both sides of the debate. It also suggests possible directions for future compromise, such as mandatory disclosure requirements of the funding of political campaigns and other political activities of business firms.Less
This chapter provides two practical applications of the legal theory of the firm elucidated in the book. One controversial issue addressed is executive compensation in corporations, which many observers believe has become disproportionate in some countries and within some firms. The chapter shows how some influential economic theories adopted simplistic “principal–-agent” prescriptions which contributed to imbalance and injustice in contemporary compensation practices (e.g. through the careless use of stock options). An institutional legal theory offers a corrective to this approach.A second controversial issue involves the political free-speech rights of corporations and other “business persons,” such as addressed in the controversial Citizens United case. The chapter argues that an institutional legal theory of the firm can deepen analysis and understanding on both sides of the debate. It also suggests possible directions for future compromise, such as mandatory disclosure requirements of the funding of political campaigns and other political activities of business firms.
Martin J. Conyon and Richard B. Freeman (eds)
- Published in print:
- 2004
- Published Online:
- February 2013
- ISBN:
- 9780226092843
- eISBN:
- 9780226092904
- Item type:
- chapter
- Publisher:
- University of Chicago Press
- DOI:
- 10.7208/chicago/9780226092904.003.0004
- Subject:
- Economics and Finance, International
For more than two decades, the United Kingdom has tried to encourage shared capitalist practices by offering tax advantages to firms that link pay to profits, provide company shares to workers, ...
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For more than two decades, the United Kingdom has tried to encourage shared capitalist practices by offering tax advantages to firms that link pay to profits, provide company shares to workers, encourage workers to save through stock options, or develop approved share-option plans. Behind the desire to increase shared compensation in the United Kingdom is the widespread belief that shared capitalist arrangements will create a better work culture with improved productivity and commitment by employees. Existing studies on profit sharing, employee ownership, and employee participation lend general support to this proposition, but these studies also show considerable variability in the effects of practices on firm performance. This chapter examines how a shared mode of compensation has affected firm performance in the United Kingdom. It uses a 1999 survey of the shared compensation strategies used by a sample of UK listed companies between 1995 and 1998; the 1998 Workplace Employment Relations Survey (WERS) of some 2,000 UK establishments or workplaces; and the 1990–1998 longitudinal WERS panel survey of nearly 900 workplaces.Less
For more than two decades, the United Kingdom has tried to encourage shared capitalist practices by offering tax advantages to firms that link pay to profits, provide company shares to workers, encourage workers to save through stock options, or develop approved share-option plans. Behind the desire to increase shared compensation in the United Kingdom is the widespread belief that shared capitalist arrangements will create a better work culture with improved productivity and commitment by employees. Existing studies on profit sharing, employee ownership, and employee participation lend general support to this proposition, but these studies also show considerable variability in the effects of practices on firm performance. This chapter examines how a shared mode of compensation has affected firm performance in the United Kingdom. It uses a 1999 survey of the shared compensation strategies used by a sample of UK listed companies between 1995 and 1998; the 1998 Workplace Employment Relations Survey (WERS) of some 2,000 UK establishments or workplaces; and the 1990–1998 longitudinal WERS panel survey of nearly 900 workplaces.
Graeme Guthrie
- Published in print:
- 2017
- Published Online:
- May 2017
- ISBN:
- 9780190641184
- eISBN:
- 9780190641214
- Item type:
- chapter
- Publisher:
- Oxford University Press
- DOI:
- 10.1093/acprof:oso/9780190641184.003.0005
- Subject:
- Economics and Finance, Financial Economics
One of a board’s most important roles is setting executive pay. This chapter introduces the various components of executive compensation schemes and analyzes the pay-setting process using the ...
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One of a board’s most important roles is setting executive pay. This chapter introduces the various components of executive compensation schemes and analyzes the pay-setting process using the efficient contracting hypothesis. Executives and the board bargain over how sensitive pay will be to the firm’s performance, weighing the incentives generated by performance-based pay against the misallocation of risk that results when risk that could be diversified away by shareholders is transferred onto a firm’s executives. Executives and the board also negotiate over the level of pay, leading to outcomes that reflect the strength or weakness of the board. This chapter uses the story of Michael Eisner’s compensation during the 21 years he was Disney’s CEO to explain the efficient contracting hypothesis and to illustrate the problems that can arise when executives’ compensation is closely tied to a firm’s performance.Less
One of a board’s most important roles is setting executive pay. This chapter introduces the various components of executive compensation schemes and analyzes the pay-setting process using the efficient contracting hypothesis. Executives and the board bargain over how sensitive pay will be to the firm’s performance, weighing the incentives generated by performance-based pay against the misallocation of risk that results when risk that could be diversified away by shareholders is transferred onto a firm’s executives. Executives and the board also negotiate over the level of pay, leading to outcomes that reflect the strength or weakness of the board. This chapter uses the story of Michael Eisner’s compensation during the 21 years he was Disney’s CEO to explain the efficient contracting hypothesis and to illustrate the problems that can arise when executives’ compensation is closely tied to a firm’s performance.
Gina Neff
- Published in print:
- 2012
- Published Online:
- August 2013
- ISBN:
- 9780262017480
- eISBN:
- 9780262301305
- Item type:
- book
- Publisher:
- The MIT Press
- DOI:
- 10.7551/mitpress/9780262017480.001.0001
- Subject:
- Information Science, Information Science
In the dot-com boom of the late 1990s, employees of Internet startups took risks—left well-paying jobs for the chance of striking it rich through stock options (only to end up unemployed a year ...
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In the dot-com boom of the late 1990s, employees of Internet startups took risks—left well-paying jobs for the chance of striking it rich through stock options (only to end up unemployed a year later), relocated to areas that were epicenters of a booming industry (which shortly went bust), chose the opportunity to be creative over the stability of a set schedule. This book investigates choices such as these made by high-tech workers in New York City’s “Silicon Alley” in the 1990s. Why did these workers exhibit entrepreneurial behavior in their jobs—investing time, energy, and other personal resources that the author terms “venture labor”—when they themselves were employees and not entrepreneurs? The author argues that this behavior was part of a broader shift in society in which economic risk shifted away from collective responsibility toward individual responsibility. In the new economy, risk and reward took the place of job loyalty, and the dot-com boom helped glorify risks. Company flexibility was gained at the expense of employee security. Through extensive interviews, the author finds not the triumph of the entrepreneurial spirit but a mixture of motivations and strategies, informed variously by bravado, naïveté, and cold calculation. She connects these individual choices with larger social and economic structures, making it clear that understanding venture labor is of paramount importance for encouraging innovation and, even more important, for creating sustainable work environments which support workers.Less
In the dot-com boom of the late 1990s, employees of Internet startups took risks—left well-paying jobs for the chance of striking it rich through stock options (only to end up unemployed a year later), relocated to areas that were epicenters of a booming industry (which shortly went bust), chose the opportunity to be creative over the stability of a set schedule. This book investigates choices such as these made by high-tech workers in New York City’s “Silicon Alley” in the 1990s. Why did these workers exhibit entrepreneurial behavior in their jobs—investing time, energy, and other personal resources that the author terms “venture labor”—when they themselves were employees and not entrepreneurs? The author argues that this behavior was part of a broader shift in society in which economic risk shifted away from collective responsibility toward individual responsibility. In the new economy, risk and reward took the place of job loyalty, and the dot-com boom helped glorify risks. Company flexibility was gained at the expense of employee security. Through extensive interviews, the author finds not the triumph of the entrepreneurial spirit but a mixture of motivations and strategies, informed variously by bravado, naïveté, and cold calculation. She connects these individual choices with larger social and economic structures, making it clear that understanding venture labor is of paramount importance for encouraging innovation and, even more important, for creating sustainable work environments which support workers.
Graeme Guthrie
- Published in print:
- 2017
- Published Online:
- May 2017
- ISBN:
- 9780190641184
- eISBN:
- 9780190641214
- Item type:
- chapter
- Publisher:
- Oxford University Press
- DOI:
- 10.1093/acprof:oso/9780190641184.003.0004
- Subject:
- Economics and Finance, Financial Economics
Manager-shareholder conflict arises due to low levels of managerial ownership and the resulting wide separation of ownership and control. However, strong boards of directors can make even small ...
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Manager-shareholder conflict arises due to low levels of managerial ownership and the resulting wide separation of ownership and control. However, strong boards of directors can make even small ownership stakes more effective at motivating executives to work in shareholders’ best interests by granting stock options, repurchasing shares, and issuing debt. Ultimately they can approve a leveraged buyout, although a strong board is needed to overcome the conflicts of interest involved in management-led buyouts. This chapter uses events at HCA, the for-profit hospital chain that undertook the world’s largest leveraged buyout followed a few years later by the largest private equity IPO, to explain how boards can narrow the gap between ownership and control. It uses a novel representation of a firm’s capital structure to analyze the techniques for boosting ownership-generated incentives at relatively low cost to shareholders.Less
Manager-shareholder conflict arises due to low levels of managerial ownership and the resulting wide separation of ownership and control. However, strong boards of directors can make even small ownership stakes more effective at motivating executives to work in shareholders’ best interests by granting stock options, repurchasing shares, and issuing debt. Ultimately they can approve a leveraged buyout, although a strong board is needed to overcome the conflicts of interest involved in management-led buyouts. This chapter uses events at HCA, the for-profit hospital chain that undertook the world’s largest leveraged buyout followed a few years later by the largest private equity IPO, to explain how boards can narrow the gap between ownership and control. It uses a novel representation of a firm’s capital structure to analyze the techniques for boosting ownership-generated incentives at relatively low cost to shareholders.
