Should Options Reward Absolute or Relative Shareholder Returns?

Abstract

Stock options have become the primary long-term incentive device used in the Untied States and Western Europe and their use continues in other parts of the world. The amount of compensation involved in these prgrmas is immense, as is thir impact of share dilution. The recent, long-running bull market has created a ”lottery”, sates the author, in which mediocre-peroming managers have been cashing in winning tickets. in this context, the author questions wether owing stock options has kept pace with changes in the business world over the past 50 years. The author does not argue the assumption that companies sould like empoyees' and executives' compensation to shareholder value. He does state, however, taht the fundamental issues concering stock options and other long-term incentive devife are wether they are designed to motivate and reward absolute or relative share holder returns. Simply put, are absolute stock price gains t he best indicator of shareholder value creation, or is permance erlative to the broad market or to industry peers a more meaningful indicator of sucess?