The Original Management Incentive Schemes
Richard T. Holden
Journal of Economic Perspectives,
During the 1990s, the structure of pay for top corporate executives shifted markedly as the use of stock options greatly expanded. By the early 2000s, as the dot-com boom ended and the Nasdaq stock index melted down, these modern executive incentive schemes were being sharply questioned on many grounds—for encouraging excessive risk-taking and a short-run orientation, for being an overly costly and inefficient method of providing incentives, and even for tempting managers of firms like Enron, WorldCom and Tyco to commit fraud in order to ensure a high stock price at the time of exercise. This article examines executive incentive schemes developed by Du Pont and General Motors in the 1920s—the original incentive schemes linking executive compensation to stock prices. The author argues that these plans were well-designed to pre-empt and address many of the criticisms of modern-day executive stock option plans.