The CEO pay of the United States’ biggest corporations is seen as the world benchmark. A large part of the way these executives are remunerated is through receiving stock options in the company they direct.
However our research shows that compensating executives in this way doesn’t necessarily lead to a higher payout of dividends to shareholders.
In dollar terms, average pay of CEOs of the US top 500 firms has increased from US$3 million in 1992 to US$12 million in 2016. A major contributor of this increase has been stock options.
For example, Thomas Rutledge, CEO of US telecommunications company Charter Communications received a US$98 million pay package in 2016. And 80% or US$78 million was in stock options.
A stock option is a financial contract that basically allows someone the right but not the obligation to buy a certain number of company shares in the future, at today’s market price. Thus, stock options allow CEOs to benefit if the company’s stock price rises, but not lose out if the stock price falls. Because in the latter case CEOs simply walk away from the transaction as the contract is not binding.