[…] restricted stock forces you to ride the stock’s rise and the stock’s fall. An option is an expectancy of a future profit. It can be worth a lot, or it can be worth nothing. There are no negative wealth implications to you of owning an option; the worst that happens is that you walk off with no more than you walked in. On the other hand, stock that you’re awarded can fall in value, which represents a personal wealth diminution. I believe that to create the proper alignment with the shareholder, you have to give the executive an incentive to ride the stock up and share the glory with the shareholders, and if the stock falls, share the pain.
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Elson is Director of the University of Delaware’s Center for Corporate Governance