A technology startup's board of directors wants to motivate its new CEO to pursue innovative but risky projects that have a high potential for long-term growth. The board is considering two compensation packages: a large annual cash bonus tied to the company's yearly profits, or a significant grant of stock options that will become valuable only if the company's stock price rises substantially over the next five years. Which of the following statements best evaluates the suitability of granting stock options for the board's specific goal?

Aligning CEO and Shareholder Interests

Incentive Alignment through Ownership

Evaluating CEO Compensation Structures

A CEO compensated with a large, fixed annual salary and no ownership in the company is more likely to approve high-risk, high-reward projects than a CEO whose compensation is primarily in the form of company stock.

Aligning Incentives at Innovate Corp

A CEO's compensation is heavily weighted towards stock options to tie their success to the company's performance. Over a two-year period, the CEO makes several strategic decisions that significantly improve the company's operational efficiency and market share relative to its competitors. However, a widespread economic recession causes the entire stock market to decline, and the company's stock price falls by 30%, rendering the CEO's options worthless. How does this scenario illustrate a key limitation of using equity stakes as an incentive mechanism?

Match each CEO compensation structure with the most likely strategic behavior it would incentivize.

When a company's board of directors grants a CEO a significant number of stock options, they are attempting to align the CEO's interests with those of the shareholders. This incentive structure works because it directly ties the CEO's personal financial ______ to the long-term performance of the company's stock price.

Analyzing a Flawed Incentive Structure