Say what you will about the CEO of a steelworking company, he's likely to understand the steel business a lot better than the CEO of a pension fund.
- Jake If you only spend 20 minutes of the rest of your life on economics, go spend them here.
And of course, its not always the case that the guy who was Chief Financial Officer of the Gap who is now CEO of a Steel Company actually does know more about the steel business than an institutional investor ... it certainly would have been true back in the day that CEO's primarily came up from operations, now that they primarily come up through finance, its not always true.
But more importantly, sure, hopefully even if the CEO started out not knowing a lot about the industry the business is in, they quickly come up to speed ... the incentive that we have set up for CEO's is to chase the quick bucks right away. Senior management blaming "the markets" are blaming the fact that they are chasing short term stock price increases ... and the right to chase short term price increases is what they were defending when there was a threat that the cost of stock options would be as such in the profit and loss statement in the 1990's and the corporate jets descended on Washington DC. I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.
Really, doesn't everyone know this? I read of it (for abouth the thosandth time) as late as a few days ago, in a book I just bought. Peak oil is not an energy crisis. It is a liquid fuel crisis.
Consider the fair value of the following 50:50 bets for stock currently at $50 to someone with options to buy stock at $48, maturing sometime in the next three months (values times 0.5 chance of occurring):
$48:$52, incremental value -$1+$1=+$0 $40:$60, incremental value -$1+$5=+$4 $30:$70, incremental value -$1+$10=+$9 ... and so on.
If the stock option is out of the money, it only makes the incentive to pursue bigger win / bigger loss bets stronger.
Of course if the stock price goes down, someone holding the stock does not recover until it returns to its original level.
By contrast, someone paid in short term stock options will have the stock options issued relative to current market price, so if last quarter they lost, they restart at a lower level and continue gambling from there.
Payment in short maturity stock options involves substantially higher moral hazard than payment in stock or in long maturity options. I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.
If you want to have bonuses for corporate officers, you could just give them an extra sack of cash. If they believe in the company they can use that money to buy shares, or even options, in it.
Alternatively one could issue shares to them, which would be held in an escrow account for 5-10 years after which they can be sold. Peak oil is not an energy crisis. It is a liquid fuel crisis.
