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Relationship between Firm Performance and CEO's Stock Options in U.S. Pharmaceutical Companies

<p> The CEO&rsquo;s compensation policy is one of the most important factors in an organization&rsquo;s success. CEO&rsquo;s stock options are awarded to align the interests of the CEO with the interests of the firms&rsquo; stakeholders. However, lack of understanding of the relationship between firm performance and a CEO&rsquo;s stock options could threaten the alignment of a CEO&rsquo;s interests with those of the stakeholders. Grounded in agency theory, the purpose of this correlation study was to examine the relationship between return on equity, return on investment, total annual revenues, and CEOs&rsquo; stock options awards, while controlling for firm size, age of CEO, and CEO tenure. Archival data from 99 U.S. pharmaceutical companies were analyzed using hierarchical linear regression. The results of the hierarchical regression analysis indicated a significant predictive model <i>F</i>(6, 262) = 42.065, <i> p</i> &lt; 0.05, <i>R</i><sup>2</sup> = .343. However, in the final model, only firm size and CEO tenure were significant. In addition, there was no significant relationship between return on equity, return on investments, and annual revenues to CEOs&rsquo; stock options. The implications for positive social change include the potential for policy makers to utilize findings in furthering dialogue related to income inequality and feeling of unfair distribution of valuable resources in the society. Pharmaceutical business leaders might affect social change by structuring CEOs&rsquo; compensation based on firm performance, encouraging innovation, and improving employment opportunities in the society.</p>
Date03 December 2016
CreatorsMwangi, George
PublisherWalden University
Detected LanguageEnglish

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