How do you incentivise your company leader to make decisions that benefit shareholders? For a long time, a typical method has been to pay them, in large part, in stock options. Chief Executive Officers (CEOs) are habitually given share-based payments to align their interests with those of shareholders – often as much as 80%of the CEO’s pay packet is made up of share- based payments. Shareholders’ investments in a company are such that they can take advantage of any benefits of success – the share price is theoretically unlimited, so the upside is unlimited. Contrarily, their downside is limited by the amount of their investment, all they can lose is what they invested – and we have all seen provisos on stock advertisements warning you to only invest what you can afford, as prices can go down as well as up. Shareholders benefit from a higher level of risk-taking in a company. If you are giving these stock options to the CEO, you are telling them they will benefit if they take more risks. Typically, there is a positive relation between risk and return, so the greater the risk, the greater the return. Data shows that, on average, a one per cent change in stock price volatility – the potential for it to go up or down – results in a $138,720 increase in the value of CEO stock options, and thus wealth. The benefits are clear – both for shareholders and for the CEOs themselves as they try to maximise a firm’s value – but there is a dark side to this rewarding of risk-taking. To generate acceptable returns, you need to take acceptable risks. But differentiating between acceptable and unacceptable risk is a very fine line. Stock options incentives can influence investment and financial decisionmaking, and can incentivise CEOs to invest in more risky projects and undertake more risky financing choices, but they can also encourage managers to engage in other risky practices, such as accounting manipulation and fraud. Managers who are under pressure to perform often engage in practices intended to boost firm profitability, but these same practices can compromise workforce safety and wellbeing to meet performance expectations. Previous research has shown that firms that just meet or beat analysts’ forecasts have higher injury rates than those that miss or beat them comfortably, and that local managers will violate rules and regulations when under pressure, a time during which there is also an increase in misconduct. Our research looked at the relation between these CEO incentives and workplace misconduct in the USA – where data is more readily available and accessible. Workplace misconduct includes health and safety violations, non-compliance with labour laws, and other violations broadly related to labour exploitation, and 16 |
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