The trouble is that corporations picked the wrong incentive. Instead of tying compensation to performance in the real world, they tied it to the stock price. This was one of the lousier ideas in the history of capitalism. It meant that the way to win was not to sell more stuff or make more money, but to increase the stock price. Much mischief has ensued, which you can read all about in Mr. Martin’s excellent book, Fixing the Game. He thinks stock options should be abolished, period.
Stock options were not the only instance of perverse results. In the mid-1990s, public companies had to start disclosing the salaries of top management. It was thought that making this information public would help keep executive compensation in check. In fact, it triggered an ever-upward spiral. “It was like Lake Wobegon. Everybody said, ‘We don’t want our CEO to be below average.’