Executive Investigator - ESOPs May Increase Risk of Fraud

Tracking and Analyzing Executive Salaries, Bonuses, and Perks

Tuesday, July 10, 2007

A new study conducted by the Institute for Operations Research and the Management Sciences (INFORMS) found that employee stock option plans (ESOPs) offered to executives as part of their compensation package could significantly increase the risk of fraud in the form of rigged share prices. The study's authors said, "Our results demonstrate two factors substantially increase the likelihood of financial misrepresentation: extremely low performance relative to average performance in the firm's industry, and high percentages of CEO compensation in stock options." Interestingly, the authors found that bonuses did not have the adverse affect of stock options.

These days there is great incentive for performance-based compensation as it is supposed to motivate executives to boost performance. Many of the tax laws and new disclosure laws clearly favor these types of performance-based compensation. However, it appears as if stock options may now be a double-edged sword - the SEC must identify new ways to discourage aggressive, unethical or illegal behaviors.

Tuesday, July 10, 2007 4:51:31 AM UTC