Abstract
Stock-based incentives (stock purchase plans, stock options plans and phantomstock plans) have become an important part of management compensation in many countries worldwide. Based on self-selection theory and contract theory, this paper addresses the effects of stock-based incentive in external and internal executive labor markets. It is shown that properly designed incentive plans can support the attraction, retention and promotion of highly capable managers, i. e. of managers that are able to increase a firm’s market value. However, a wide range of contract offers with stock-based incentives do not meet the necessary design requirements. As a consequence the respective companies run the risk of losing the best managerial talents to competitors that offer more appealing stock-based incentives.
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