Sunday, May 04, 2008

Stock Based Compensation as Incentive doesn't Work

From the Economist Blog:

In the 1990s compensation that included stock in your firm was considered extremely desirable. The last eight years the potential downside of having your financial and human capital so closely correlated has become apparent.
I should preface that as saying that it's probably no better than cash - and even less so during a bear market if you're stuck with shares that only seem to go down. It's a pretty basic rule that incentives should be provided for targeted results that are in an employee's effective realm of control.

The likelihood of what a frontline staff person does making an impact on stock performance seems pretty low... on the other hand, this obviously works in smaller startups where you have a much smaller group to begin with and where each employee really does have an impact on the value of the firm. My preference (and what we try to do) would be to break a business down to much smaller operating units and reward directly based on that unit's short term and long term profitability.

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