Whether managers will, in fact, act in the best interests of stockholders depends on two factors. First, how closely are management goals aligned with stockholder goals? This question relates, at least in part, to the way managers are compensated. Second, can managers be replaced if they do not pursue stockholder goals? This issue relates to control of the firm. As we will discuss, there are a number of reasons to think that even in the largest firms, management has a significant incentive to act in the interests of stockholders.
Managerial Compensation Management will frequently have a significant economic incentive to increase share value for two reasons. First, managerial compensation, particularly at the top, is usually tied to financial performance in general and often to share value in particular. For example, managers are frequently given the option to buy stock at a bargain price. The more the stock is worth, the more valuable is this option. In fact, options are often used to motivate employees of all types, not just top managers. For example, in late 2014, Google’s more than 46,000 employees owned enough options to buy 6.1 million shares in the company. Many other corporations, large and small, have adopted similar policies.
The second incentive managers have relates to job prospects. Better performers within the firm will tend to get promoted. More generally, managers who are successful in pursuing stockholder goals will be in greater demand in the labor market and thus command higher salaries.
In fact, managers who are successful in pursuing stockholder goals can reap enormous rewards. For example, according to The Wall Street Journal, the best-paid executive in 2013 was Lawrence Ellison, the CEO of Oracle. According to The Journal, he made about $76.9 million. By way of comparison, Ellison made only slightly more than LeBron James ($72.3 million) and Robert Downey Jr. ($75 million). Information about executive compensation, along with lots of other information, can be easily found on the Web for almost any public company. Our nearby Work the Web box shows you how to get started.