Aligning Executive Compensation with Shareholders

Medium Corporate Governance Executive Compensation

In the context of corporate governance, executive compensation is a critical factor influencing the decisions and performance of a company's leadership. According to best practices, executive pay should align the interests of executives with those of shareholders. However, there are various methods of structuring compensation packages that can impact this alignment.

Consider the following statement regarding executive compensation:

“Incentive plans that rely heavily on stock options tend to align the interests of executives with those of shareholders more effectively than cash-based compensation.”

Which of the following interpretations of this statement is correct?

Stock options create a stronger incentive for executives to increase the stock price over the long term than cash bonuses.

Cash-based compensation is less effective at aligning executive interests with shareholder interests compared to stock options due to less risk exposure.

Executives are less motivated by stock options as they could be exercised at a low stock price.

Hint

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