10. Equity-Based Compensation: Stock and Stock Options

During the 1980s, the pay packages of top executives were often unrelated to the success of the corporations they managed. How could that have occurred when their compensation consisted of salaries plus bonuses that were paid only if certain financial targets were achieved? In fact, CEOs received about 50% of their pay in the form of bonuses. The assumption was that the total compensation (salary plus bonus) received by these executives would be highly correlated with changes in company performance. The empirical data, however, failed to support that assumption. A frequently cited 1990 Harvard Business Review article by Michael C. Jensen and Kevin J. Murphy reported an extensive statistical ...

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