Stock Market’s Rise May Be Producing Crop of Very Cautious CEOs, Study of Stock Options Suggests

With the stock market surge over the past several years, executive stock options awarded near the bottom of the market are worth small – or not so small – fortunes. How does this affect the way CEOs run their companies? A hefty increase in options’ paper value may lead to sharp decrease in risk-taking

For all CEOs, the professors calculated the current paper value of stock options (averaging $13.5 million) from the number of options held at each year’s end multiplied by the amount the options were in the money. They calculated prospective value (averaging $18 million) from four factors — the number of options CEOs held, their expiration date, the price of the underlying stock, and the average yearly rise in the Dow industrial index (6.8%) during the 14 years covered by the study. Hedging was gauged from the availability of put options covering companies in the sample and the volume of trading in these instruments.

Among the findings:

  • An increase of one standard deviation in CEOs’ prospective stock-option haul (say, from the sample’s mean of $18 million to $46 million) was associated with a 33% increase in strategic risk-taking.
  • In sharp contrast, an increase of one S.D. in CEOs’ current stock-option haul (say, from the sample’s mean of $13.5 million to $42.5 million) was associated with a 18% decrease in risk-taking.
  • An increase of one S.D. in both prospective and current stock-option wealth was associated with a 5% increase in risk-taking.
  • Being able to buy put options as a hedge boosted by 30% the positive effect of prospective stock-option value on CEO risk-taking.

In sum, when company-granted stock options are a major part of their compensation, CEOs are most likely to take strategic risks when they are relatively new to their position, are able to hedge their gains, and have shown promise without yet having gained the total confidence of their directors. In the words of Wiseman, “A little bit of vulnerability, a pinch of financial hedging, and ample promise of bigger gains ahead.”


MORE LIKE THIS

  • Get the CEO Briefing

    Sign up today to get weekly access to the latest issues affecting CEOs in every industry
  • upcoming events

    Roundtable

    Strategic Planning Workshop

    1:00 - 5:00 pm

    Over 70% of Executives Surveyed Agree: Many Strategic Planning Efforts Lack Systematic Approach Tips for Enhancing Your Strategic Planning Process

    Executives expressed frustration with their current strategic planning process. Issues include:

    1. Lack of systematic approach (70%)
    2. Laundry lists without prioritization (68%)
    3. Decisions based on personalities rather than facts and information (65%)

     

    Steve Rutan and Denise Harrison have put together an afternoon workshop that will provide the tools you need to address these concerns.  They have worked with hundreds of executives to develop a systematic approach that will enable your team to make better decisions during strategic planning.  Steve and Denise will walk you through exercises for prioritizing your lists and steps that will reset and reinvigorate your process.  This will be a hands-on workshop that will enable you to think about your business as you use the tools that are being presented.  If you are ready for a Strategic Planning tune-up, select this workshop in your registration form.  The additional fee of $695 will be added to your total.

    To sign up, select this option in your registration form. Additional fee of $695 will be added to your total.

    New York, NY: ​​​Chief Executive's Corporate Citizenship Awards 2017

    Women in Leadership Seminar and Peer Discussion

    2:00 - 5:00 pm

    Female leaders face the same issues all leaders do, but they often face additional challenges too. In this peer session, we will facilitate a discussion of best practices and how to overcome common barriers to help women leaders be more effective within and outside their organizations. 

    Limited space available.

    To sign up, select this option in your registration form. Additional fee of $495 will be added to your total.

    Golf Outing

    10:30 - 5:00 pm
    General’s Retreat at Hermitage Golf Course
    Sponsored by UBS

    General’s Retreat, built in 1986 with architect Gary Roger Baird, has been voted the “Best Golf Course in Nashville” and is a “must play” when visiting the Nashville, Tennessee area. With the beautiful setting along the Cumberland River, golfers of all capabilities will thoroughly enjoy the golf, scenery and hospitality.

    The golf outing fee includes transportation to and from the hotel, greens/cart fees, use of practice facilities, and boxed lunch. The bus will leave the hotel at 10:30 am for a noon shotgun start and return to the hotel after the cocktail reception following the completion of the round.

    To sign up, select this option in your registration form. Additional fee of $295 will be added to your total.