Evaluation of the "Agency Theory" that led to expansion of stock options in executive remuneration packages.
Written in 2004; 5,024 words; 11 sources; MLA; $ 126.95
Paper Summary:
This report evaluates whether or not the hypothesis at the heart of the "Agency Theory", which states that if an executive is given an ownership stake, it will have a positive effect on stock performance, works as expected. Furthermore, this paper tracks the increasing use of the "Agency Theory" in executive compensation and enumerates and evaluates the effects that the increasing use of the "Agency Theory" has had on American business and on stock performance. The paper also evaluates the effect of what has been described as "over the top" use of increasingly generous, stock-dependent, executive compensation packages, both on stock performance and on other business evaluative factors. The effect of the scandals involving executive compensation/stock performance on the social/commercial fabric of the U.S. is discussed briefly, as well.
Outline
The "Agency Theory", Executive Compensation and Stock Performance
The Effect of Pay on Executive Motivation
The Effect of FASB Rules on Compensation/Stock Performance
From the Paper:
"In the wake of the Enron, ImClone and WorldCom financial scandals, the increasing use of stock options as part of executive compensation packages came under public scrutiny. Because of the lax was in which FASB guidelines are written, it was possible, lacking adequate corporate governance, for CEOs to use their stock options to increase their personal wealth while diminishing the strength of the corporation and decreasing"or completely negating"benefits for shareholders. In addition to the problematical FASB rules, also operative was a management theory, the Agency Theory, formulated by academicians and economists in the last century. The theory held that giving executives a financial stake in the financial health of the company would increase their motivation to run those companies for maximum profits for shareholders; in short, this form of executive compensation was thought to be able to produce superior stock performance. The findings of several researchers even before the scandals of the past few years, however, revealed that results often departed wildly from what the theory predicted."
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