Hands-Off Options

Abstract

Executives' use of inside information and price manipulation to boost their trading profits hurts public investors. Each extra dollar pocketed by managers comes at the expense of public shareholders. This Article suggests that firms use what the author calls "hands-off" options-options that are cashed out according to a fixed, gradual, and pre-announced schedule. By removing executives' control over the timing of unwinding, such options would make it impossible for executives to sell on inside information. Because this hands-off approach would reduce executives' ability to boost their pay under shareholders' radar screens, managers are likely to resist its adoption. Boards, in turn, may be reluctant to insist on a hands-off arrangement in the face of managers' objections. Thus, institutional investors -- who in the past have had some success in improving executive pay arrangements -- should strongly encourage firms to adopt the hands-off approach.