In football, there is a rigid separation of the real market — the games played on Sundays — from the expectations market, or the betting that takes place prior to the game. No participant in the real market is permitted to participate in any way in the expectations market. If they do, they risk a lifetime ban for even one infraction. There is an even bigger game in which players in the real market not only are allowed, but are strongly encouraged to play in the related expectations market — even though exactly the same incentive problems exist. That game consists of the markets in which publicly traded corporations compete.
Senior executives, arguably the most critical players in the real market, are strongly encouraged and often compelled to participate in the expectations market. They are given massive stock-based compensation under the misguided theory that stock-based compensation aligns their interests with the interests of shareholders. Stock-based compensation does nothing of the sort. Like encouraging NFL players to bet on football, it encourages executives to manipulate the expectations market and the real market to benefit themselves at the expense of outside shareholders.
Author: Roger L. Martin
Subjects: Compensation, Corporate Governance, Economics, Finance
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