Fixing Executive Options: The Veil of Ignorance

Who says you can't rewrite history? Dozens of companies have been caught in the practice of backdating options for top executives. But this is only part of the problem with C-level compensation packages, which often motivate top executives to act in their own best interests rather than those of shareholders. Professors Mihir Desai and Joshua Margolis turn to philosopher John Rawls for a solution: Reward the execs, but don't give them the details. Key concepts include:

  • Too often executive incentive packages are not aligned with the best interests of shareholders. Why create long-term value if your bread is buttered by quarterly performance?
  • Option compensation could be restructured to ensure that managers were aware of the value of their compensation without any knowledge of the details of their compensation—a concept inspired by philosopher John Rawls' work on distributive justice.
  • These options may only be useful for CEOs, senior officers, and directors—not middle management.