When Boeing CEO Dennis Muilenburg was ousted from the company for his mismanagement of the 737 Max crisis, he left with stock options worth at least a net $18.5 million. At the same time, Boeing’s shareholders took a beating, with the stock losing 25% of its value. Muilenburg, in other words, left with a big payout of options even though his former firm’s performance was cratering.
Such discrepancies between firm performance and CEO compensation are unfortunately all too common, and is largely the result of the indiscriminate awarding of stock options and other incentive compensation. Stock options are supposed to ensure that CEOs deliver high returns to shareholders, but they often fail to do so. And yet, firms continue to engage in the practice. In 2019, the last year for which we have figures, average CEO compensation, including the value of stock options granted (whether exercised or not), grew by 14% to $21.3 million, continuing an ongoing pattern. Further, boards have often rationalized their decision to offer CEOs stock options by arguing it is compensation that does not need to be expensed on the firm’s financial reports. But that rationale lost its luster once the Financial Accounting Standards Board (FASB) issued its 2004 rule requiring firms to treat stock options like any other expense.
Given this spotty record, we wondered: Should firms issue stock options at all?Should You Reward Your CEO with Stock Options?