What’s wrong with stock options

From Untangling Skill and Luck by Michael Mauboussin:

Ideally, a compensation program pays an individual for his or her skillful contribution toward achieving a desirable objective. In reality, many compensation programs pay for randomness. One prominent example is the use of employee stock options (ESOs). While ESOs seek to align the interests of managers and shareholders, a worthy goal, in reality they largely end up remunerating for randomness. Consider the 1990s, when stock prices soared to lofty levels. Executives with ESOs made substantial sums, even if their relative performance was poor. Likewise, executives who led their companies in the 2000s did poorly with their ESOs. In determining the ultimate amount of pay, the vagaries of the market overwhelmed the performance of the executives. Compensation programs need to be modified so as to strip out as much randomness as possible.

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