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Boards, shareholders, and journalists often look at a chief executive's annual compensation plan to determine whether the company is offering the right incentives to increase shareholder value. Few consider another key question: how does the compensation that the CEO has already received over the years in the form of stock and stock options influence managerial decision making?
This tool provides insight into that question by allowing you to plot changes in an executive's wealth against changes in the company share price ranging from +100% to -100%. A manager who is rewarded predominantly in restricted stock or holds only stock will see a change in wealth that is essentially a straight line. If the manager holds a large number of stock options—especially out-of-the-money stock options—the payoff curve can become quite steep. Steep payoff structures provide strong financial incentive to perform but might encourage unintentional or excessive risk taking.
Using the drop downs below, compare the payoff functions of up to 5 executives, among one or multiple firms.