The Hybrid Option: A New Approach to Equity Compensation
Equity compensation can provide part of the expected reward needed to attract and retain talent while strengthening the unity of interest between management and its shareholders. But more can be done. Until now, managers and boards have used standard equity instruments such as restricted common stock and at-the-money stock options. Boards typically place various restrictions on these instruments to improve retention or alignment, or mix and match them according to taste or fashion. But each of these standard instruments has well-understood limitations. For example, employee stock options that are granted at the money are worth considerably less, on the day of the grant, to the managers that receive them than to the shareholders of the companies that give them. And the values of both options and restricted stock depend heavily on variables, like the general state of the economy, that have little or nothing to do with managerial performance. Copyright Copyright (c) 2009 Morgan Stanley.
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