Author: Holden, Richard T.

Source: The Journal of Economic Perspectives, Volume 19, Number 4, Fall 2005 , pp. 135-144(10)

Publisher: American Economic Association

Abstract:

During the 1990s, the structure of pay for top corporate executives shifted markedly as the use of stock options greatly expanded. By the early 2000s, as the dot-com boom ended and the Nasdaq stock index melted down, these modern executive incentive schemes were being sharply questioned on many grounds—for encouraging excessive risk-taking and a short-run orientation, for being an overly costly and inefficient method of providing incentives, and even for tempting managers of firms like Enron, WorldCom and Tyco to commit fraud in order to ensure a high stock price at the time of exercise. This article examines executive incentive schemes developed by Du Pont and General Motors in the 1920s—the original incentive schemes linking executive compensation to stock prices. The author argues that these plans were well-designed to pre-empt and address many of the criticisms of modern-day executive stock option plans.

Document Type: Research article

DOI: http://dx.doi.org/10.1257/089533005775196688

Publication date: 2005-09-01

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• The Journal of Economic Perspectives (JEP) attempts to fill a gap between the general interest press and most other academic economics journals. The journal aims to publish articles that will serve several goals: to synthesize and integrate lessons learned from active lines of economic research; to provide economic analysis of public policy issues; to encourage cross-fertilization of ideas among the fields of thinking; to offer readers an accessible source for state-of-the-art economic thinking; to suggest directions for future research; to provide insights and readings for classroom use; and to address issues relating to the economics profession.
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