Most boards believe that rewarding managers through stock options is an effective incentive leading to long term shareholder value. Equity ownership, by definition, aligns managers and shareholders. But effective incentive implies a motivation to do something, as opposed to a simple desire to see the share price go up. Most senior executives, right up to the CEO, will tell you that movement in the stock price over several years usually has more to do with exogenous factors than with the actions of management.
Management actions do matter, but they matter indirectly, over a long period of time and in often unpredictable ways, all of which tend to make equity ownership a weak motivator. While the alignment provided by equity ownership does motivate managers to seek out the drivers of shareholder value, equity by itself is inherently unable to provide a sufficiently detailed guide for value-creation to managers.
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