This chapter on executive compensation and stock options is effectively a continuation of Chapter 9 on performance pay. It provides an overview of executive compensation and an intuitive, non-technical treatment of stock options that focuses on the worker incentives that options create. There is a lot of discussion of risk (of income loss) that builds on Chapter 9, and the “pay for luck” discussion that ends the chapter concerns the possibility of firms’ reneging on CEOs’ bonus payments, which echoes the wage-theft themes from Chapter 2. Section 10.2 covers the executive bonuses known as “80/120” plans, representing them pictorially as nonlinear functions of a performance measure (that are upward-sloping in some parts, as in the performance-pay graphs of Chapter 9). The section on stock options is detailed and explains all of the key terminology and the most important concepts in this area. The distinction between the intrinsic value and the market value of an option is made carefully, with an intuitive, non-technical discussion of the Black–Scholes–Merton options valuation formula, and the role of risk is explained in detail.

This chapter on executive compensation and stock options is effectively a continuation of Chapter 9 on performance pay. It provides an overview of executive compensation and an intuitive, non-technical treatment of stock options that focuses on the worker incentives that options create. There is a lot of discussion of risk (of income loss) that builds on Chapter 9, and the “pay for luck” discussion that ends the chapter concerns the possibility of firms’ reneging on CEOs’ bonus payments, which echoes the wage-theft themes from Chapter 2. Section 10.2 covers the executive bonuses known as “80/120” plans, representing them pictorially as nonlinear functions of a performance measure (that are upward-sloping in some parts, as in the performance-pay graphs of Chapter 9). The section on stock options is detailed and explains all of the key terminology and the most important concepts in this area. The distinction between the intrinsic value and the market value of an option is made carefully, with an intuitive, non-technical discussion of the Black–Scholes–Merton options valuation formula, and the role of risk is explained in detail.

Rewarding long-term value creation while deterring short-term gaming